12.1 Bankruptcy Jurisdiction

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

12.1 BANKRUPTCY JURISDICTION

12.101 History.

A. 1898 Act. Jurisdiction in bankruptcy cases has been a controversial issue. Under the Bankruptcy Act of 1898, bankruptcy courts had limited jurisdiction commonly referred to as "summary jurisdiction." Summary jurisdiction is the only form of jurisdiction that a bankruptcy judge possessed under the Bankruptcy Act of 1898. Other courts had plenary jurisdiction. Summary jurisdiction extended only to matters concerned with the administration of the bankruptcy estate and some disputes between the bankruptcy trustee and third parties involving rights to money and other property in which the estate had an interest. The test for deciding whether a dispute with a third party was within the bankruptcy court's summary jurisdiction turned on (i) whether the property in question was in the actual possession of the bankrupt at the time of the commencement of the case; (ii) whether the property in question was in the constructive possession of the bankrupt at the time of the commencement of the case; and (iii) whether the third party consented to the bankruptcy court's jurisdiction either actually or by implication.

B. The 1978 Code. In 1978, Congress created a bankruptcy court with pervasive jurisdiction. However, for political reasons, the bankruptcy judge was not an Article III judge. The Constitution insures the independence of judges appointed under Article III by protecting them with life tenure and removal from office only by Congressional impeachment. It also assures that their compensation cannot be diminished. Article I of the Constitution allows Congress to create inferior courts which are granted limited and narrowly defined subject matter jurisdiction. In enacting the Bankruptcy Code, Congress gave bankruptcy judges none of the protections found in Article III of the Constitution but much of the power and responsibilities of an Article III judge.

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12.102 Background.

A. Northern Pipeline Construction Co. v. Marathon Pipe Line Co. ¹ In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., the United States Supreme Court declared unconstitutional the jurisdictional provisions of the Bankruptcy Reform Act of 1978, which gave broad jurisdiction to the bankruptcy court. To remedy this defect, the Bankruptcy Amendments and Federal Judgeship Act of 1984 placed jurisdiction in the district courts, which are Article III courts, and made the bankruptcy courts a unit of the district court to which bankruptcy cases and proceedings could be referred. Thus, jurisdiction for bankruptcy cases and proceedings is in the district court with an automatic reference to the bankruptcy court.

Section 151 of title 28 refers to a bankruptcy judge and a bankruptcy court as a unit of the district court. This reference is important in reading the remaining sections of title 28. When the term "district court" appears in section 1334 or section 157 of title 28, it refers not only to the United States District Court but also to the Bankruptcy Court.

The term "case" is a term of art used both in the Bankruptcy Rules and the Bankruptcy Code to refer to the entire Chapter 7, Chapter 9, Chapter 11, Chapter 12, or Chapter 13 case. The term "proceeding" refers to a controversy that arises in connection with a case.

B. Stern v. Marshall. ² In Stern v. Marshall, the Supreme Court found that the statutory grant of power to bankruptcy judges in 28 U.S.C. § 157(b)(2)(C) to hear and determine core proceedings constituting counterclaims by the bankruptcy estate against persons filing claims in the bankruptcy case exceeded the limits of Article III of the Constitution.

C. Executive Benefits Insurance Agency v. Arkinson. ³ In Executive Benefits Insurance Agency v. Arkinson, a Chapter 7 trustee had brought suit to recover a fraudulent transfer made to a company owned by a principal of the debtor, and the bankruptcy court granted the trustee summary judgment. The district court conducted a de novo review. The Supreme Court held that claims such as fraudulent transfers that are listed as being

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"core" should be considered with the bankruptcy court's jurisdiction because they are "related to a case under Title 11." ⁴ Because the district court had conducted a "de novo" review, the Supreme Court found that there was functional compliance with the requirements it established in Stern.

D. Wellness International Network, Ltd. v. Sharif. ⁵ In Wellness International Network, Ltd. v. Sharif, the Supreme Court held that parties to a Stern claim can consent to having a final judgment determined by a bankruptcy judge and that consent can be implied as long as it is knowing and voluntary.

12.103 Jurisdiction. Subsections (a), (b), and (e) of 28 U.S.C. § 1334 provide for the jurisdiction of district courts over bankruptcy cases, property of the bankruptcy estate, and proceedings within the bankruptcy cases.

Subsection (a) provides that the district courts have original and exclusive jurisdiction over all bankruptcy cases. Subsection (b) provides that the district courts have original but not exclusive jurisdiction over proceedings arising under title 11 or arising in or related to cases under title 11. Read together, these subsections provide that only district courts may hear bankruptcy cases, but state courts as well as district courts may have jurisdiction over proceedings arising under title 11 or arising in or related to cases under title 11.

Subsection (b) establishes three categories of proceedings: those arising under...