Bankruptcy Court Jurisdiction

Originally published by Jason B. Freeman.

As a general rule, bankruptcy courts enjoy broad authority over bankruptcy cases and related proceedings under Title 11 of the United States Bankruptcy Code. But confusing Supreme Court precedent together with multiple Congressional amendments to an already complex Bankruptcy Code have left bankruptcy court jurisdiction all but clear.

Congress has granted United States District Courts with original and exclusive jurisdiction over all cases under title 11 and original jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11” of the Bankruptcy Code[1] and has enabled them to refer such proceedings to bankruptcy judges.[2] Congress effectively established three jurisdictional categories of bankruptcy matters: those (1) arising under title 11, (2) arising in title 11, and (3) related to title 11. In using such comprehensive language, Congress conferred substantial federal question jurisdiction over bankruptcy proceedings and related matters, usurping jurisdiction over many types of matters previously relegated to state courts.[3] Even the Supreme Court has acknowledged that “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.”[4]In enacting the Bankruptcy Code, Congress expanded federal jurisdiction to all bankruptcy cases and matters merely “related to” bankruptcy proceedings.[5]

As a Congressionally created court, a bankruptcy court’s power is statutorily constrained.[6] Congress provided for a few different types of statutory abstention in the context of bankruptcy proceedings. Bankruptcy courts may abstain from hearing a particular bankruptcy proceeding “in the interest of justice, or in the interest of comity with State courts or respect for State law.”[7] Courts have broad discretion to abstain under this “permissive abstention” doctrine.[8] Courts are required to abstain from hearing certain proceedings commenced in state court.[9] Additionally, the Bankruptcy Code allows the court to abstain from hearing an entire bankruptcy case in certain circumstances.[10]

In addition to limiting federal bankruptcy jurisdiction generally, congress also enacted limitations specific to bankruptcy judges. Once a district court has established jurisdiction over a matter and referred it to a bankruptcy court, the bankruptcy judge’s authority in a given case depends on the type of proceeding before the court. Bankruptcy judges are statutorily empowered to “hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11.”[11] Whether or not a bankruptcy judge has the power to enter a final judgment in a particular bankruptcy matter is a separate inquiry from whether or not federal question jurisdiction exists.[12]

When delineating the contours of bankruptcy court authority, Congress divided bankruptcy proceedings into two types: (1) core and (2) non-core. If the matter is a core proceeding, then the bankruptcy judge is authorized to enter a final judgment on the merits, reviewable by the district court under the “clearly erroneous” standard.[13] However, if the bankruptcy judge determines that a matter is not a core proceeding or otherwise related to a bankruptcy case, the judge is only authorized to submit proposed findings of fact and conclusions of law to the district court.[14] Only district judges may enter final orders or judgments in non-core proceedings after reviewing the bankruptcy’s findings and conclusions de novo.[15]

While the Bankruptcy Code undoubtedly establishes comprehensive jurisdiction, the authority of bankruptcy courts is further limited by the separation of powers principles embodied in the Constitution. Unlike their district court counterparts, whose legitimacy and authority find their roots in Article III, bankruptcy courts are statutory creatures established by an Article I power. Article III, § 1 of the United States Constitution mandates that the “judicial power” of the United States be vested in the Supreme Court and its inferior courts, which includes U.S. District Courts. Moreover, Article III requires tenure during good behavior and salary protection against compensation diminution for judges exercising the “judicial power of the United States.” These protections were meant to ensure the integrity and independence of the judicial branch from the other branches in our system of checks and balances.[16]

Bankruptcy judges, by contrast, are “judicial officers” that, together, constitute a “unit” of the district court.[17] The United States Courts of Appeal appoint bankruptcy judges to serve fourteen-year terms, as opposed to district judges who are nominated by the President and confirmed by the Senate for life tenure.[18]Given these distinctions, the Supreme Court has limited the ability of non-Article III judges to enter final judgments in certain circumstances.

Just a few short years after Congress enacted the Bankruptcy Act of 1978, the Supreme Court held that Article III hindered Congress’ ability to vest bankruptcy courts with jurisdiction to decide certain state-law claims against a party who was not otherwise a party to the bankruptcy proceedings.[19] The state contract-law claims and “other counts which are the stuff of the traditional actions at common law tried by the courts at Westminster in 1789” at issue in Northern Pipeline were claims arising entirely under state law and were only before the bankruptcy court because the debtor had previously filed for bankruptcy in that court.[20] The plurality distinguished the restructuring of debtor-creditor relations, which it found to constitute the “core” of bankruptcy powers, from the adjudication of state-created private rights and held that the right to recover contract damages was a “private right” to be adjudicated by Article III courts.[21]

Congress responded to the Supreme Court’s unfavorable opinion in Northern Pipeline by enacting the Bankruptcy Amendments and Federal Judgeship Act of 1984, clawing back some of the broad jurisdictional grant it had previously vested in the newly created bankruptcy courts. Without a clear majority opinion from the Supreme Court, the 1984 amendments turned out to be ambiguous, at best.[22] Rather than mandating bankruptcy court jurisdiction over bankruptcy proceedings and related matters as the 1978 Act had done, Congress divided bankruptcy matters into core and non-core proceedings, statutorily empowering bankruptcy judges to hear and decide “core” proceedings. Congress failed to explain what it meant by “core” and, instead, chose to enact a non-exhaustive list of sixteen examples.[23]

The Supreme Court restricted the authority of bankruptcy courts over certain state-law matters yet again in Stern v. Marshall. In that case, the Court found that Article III prevented bankruptcy court authority over a debtor’s counterclaim for tortious interference against a party who had filed a proof of claim in the debtor’s bankruptcy case, even though Congress had explicitly deemed “counterclaims by the estate against persons filing claims against the estate” to constitute core bankruptcy proceedings.[24] The Court held unconstitutional a bankruptcy court’s authority to enter a final judgment on a state common law counterclaim that was independent of federal bankruptcy law and not resolvable in the process of ruling on a creditor’s proof of claim in bankruptcy.[25] The test is “whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.”[26] The Court has since explained that when a claim is statutorily deemed as “core” but not finally determinable by bankruptcy courts under Article III, courts should treat the claim like a “non-core” proceeding by hearing the proceeding and submitting proposed findings of fact and conclusions of law to the district court for de novo review.[27]

Following Stern, lower courts have debated over whether or not Article III permits bankruptcy courts to enter final judgment on other proceedings statutorily deemed as “core” bankruptcy matters. While purporting to limit its ruling to the “one isolated respect” before the Court, Stern raises questions about what other matters previously assumed to be properly related to bankruptcy proceedings might, instead, be unconstitutional under Article III and the Stern analysis. Answering this question of bankruptcy court jurisdiction and authority is by no means a simple endeavor.

 

 

 

[1] 28 U.S.C. §§ 1334(a), (b). The Bankruptcy Code also gives the district court broad jurisdiction over all of the debtor’s property once a case is commenced under title 11. § 1334(e)(1).

[2] 28 U.S.C. § 157(a). District courts also have the power to withdraw cases referred to the bankruptcy courts for cause shown. § 157(d). In addition to allowing permissive withdrawal, §157(d) also mandates withdrawal in certain instances.

[3] See Stern v. Marshall, 564 U.S. 462, 494 (2011) (noting the “broad substantive jurisdiction” exercised by bankruptcy courts under the Bankruptcy Code); see also Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995) (finding that the language used by Congress suggests a jurisdictional “grant of some breadth”).

[4] Id. (quoting Pacor, Inc. v. Higgins, 743 F.2d 984 (1984).

[5] See In re Wilshire Courtyard, 729 F.3d 1279, 1287 (9th Cir. 2013) (“A bankruptcy court’s related to jurisdiction is very broad, including nearly every matter directly or indirectly related to the bankruptcy.”) (internal quotation marks omitted); see also Lindsey v. O’brien (In re Dow Corning Corp.), 86 F.3d 482, 489 (6th Cir. 1996) (“In addressing the extent of a district court’s bankruptcy jurisdiction under Section 1334(b) over civil proceedings ‘related to’ cases under title 11, we start with the premise that the emphatic terms in which the jurisdictional grant is described in the legislative history, and the extraordinarily broad wording of the grant itself, leave us with no doubt that Congress intended to grant to the district courts broad jurisdiction in bankruptcy cases.”) (internal quotation marks omitted). Different circuits have adopted different tests for determining precisely what it means for a matter to be “related to” bankruptcy proceedings. See Celotex, 514 U.S. at 308, n. 6 (discussing the various circuit tests) (“But whatever test is used, these cases make clear that bankruptcy courts have no jurisdiction over proceedings that have no effect on the estate of the debtor.”).

[6] Celotex, 514 U.S. at 307 (“The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.”).

[7] 28 U.S.C. § 1334(c)(1).

[8] See Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1206 (5th Cir. 1996).

[9] 28 U.S.C. § 1334(c)(2). “For mandatory abstention to apply, a proceeding must: (1) be based on a state law claim or cause of action; (2) lack a federal jurisdictional basis absent the bankruptcy; (3) be commenced in a state forum of appropriate jurisdiction; (4) be capable of timely adjudication; and (5) be a non-core proceeding.” Lindsey v. O’Brien (In re Dow Corning Corp.), 86 F.3d 482, 497 (6th Cir. 1996).

[10] 11 U.S.C. § 305(a).

[11] 28 U.S.C. § 157(b)(1). The Bankruptcy Code requires personal injury torts and wrongful death claims to be tried in district courts. § 157(b)(5).

[12] See Stern v. Marshall, 564 U.S. 462, 479–80 (2011) (“Because branding a rule as going to a court’s subject-matter jurisdiction alters the normal operation of our adversarial system, we are not inclined to interpret statutes as creating a jurisdictional bar when they are not framed as such.”) (internal quotation marks omitted). The Court distinguished between the allocation of authority among federal courts and actual subject matter jurisdiction.

[13] 28 U.S.C.§ 158(b).

[14] 28 U.S.C. § 157(c)(1).

[15] Id.

[16] See The Federalist, No. 79 (A. Hamilton) (“NEXT to permanency in office, nothing can contribute more to the independence of the judges than a fixed provision for their support.”) The Framers of the Constitution were concerned with the ability of one branch of government to control the livelihood of another, thereby compromising the integrity of judges and the Framers’ intended form of government. Id. (“In the general course of human nature, A POWER OVER A MAN’s SUBSISTENCE AMOUNTS TO A POWER OVER HIS WILL.”) (emphasis in original). The ninth of the twenty-seven grievances stated against King George III in the Declaration of Independence similarly evidences the inherent concern present when one branch controls another: “He has made Judges dependent on his Will alone for the tenure of their offices, and the amount and payment of their salaries.”

[17] 28 U.S.C. §§ 151, 152(e).

[18] 28 U.S.C. §§ 152 (a), (b).

[19] Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87 (1982) (plurality opinion). A plurality of the Court would have invalidated the broad jurisdictional assignment over all matters related to bankruptcy to the new bankruptcy court, but two justices disagreed with the plurality’s broad framing of the question presented and would have limited the Constitutional question and only invalidated as much of the Bankruptcy Act of 1978 “as enables a Bankruptcy Court to entertain and decide” the certain claims at issue. Id.at 89–91 (Rehnquist, J., concurring in the judgment).

[20] Id. at 90. (Rehnquist, J., concurring in the judgment).

[21] Id. at 71–72 (plurality opinion). The concurrence, however, declined to determine whether the case at issue fit within in the “public rights” doctrine, under which the Court has upheld the Constitutionality of Congressionally created courts. Id. at 90 (Rehnquist, J., concurring in the judgment).

[22] See Stern v. Marshall, 564 U.S. 462, 475–76 (2011).

[23] 28 U.S.C. § 152(b)(2).

[24] 28 U.S.C. § 152(b)(2)(C).

[25] Stern, 564 U.S. at 503. It is important to note that the Court resolved the issue in Stern on the basis of bankruptcy court authority under § 157(b)(5), not under the jurisdictional statute, § 1334. The Court explicitly denounced the argument that § 157(b)(5) is a jurisdictional statute. Id. at 479–80.

[26] Id. at 499. The Court found it insufficient to overcome Article III that a claim might have some effect on a bankruptcy case.

[27] Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 36 (2014).

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