Chapter 3 Jurisdiction

• Jurisdiction: United States

Chapter 3 Jurisdiction

§ 3.1 ~ In general

Bankruptcy law is replete with problems of jurisdiction and procedure — so much so that we have divided them into two chapters. In this one, we take up the basic framework of a bankruptcy case. In the next, we deal with more specific jurisdictional issues, as well as with appeals from bankruptcy court decisions, and some problems of federalism.

§ 3.2 ~ Why Things Are the Way They Are

Why is bankruptcy litigation such a tangle for the beginner? There are two reasons. First is the matter of jurisdiction. As we will explain more fully later, most bankruptcy litigation gets handled by a bankruptcy judge in a bankruptcy court. But bankruptcy judges are not appointed pursuant to Article III of the U.S. Constitution like federal district and appellate judges. So they have to exercise their powers as a kind of extension of the district court. This leads to a lot of cumbersome work-around rules with reference to judicial power, and finality and review of bankruptcy court judgments and orders.

The second problem is the structure of the bankruptcy case. Filing a petition commences the bankruptcy case, but within the case there will be many discrete proceedings, from motions to address routine administrative matters that are often uncontested to "contested matters" and "adversary proceedings" that resemble a typical civil litigation.

§ 3.3 ~ A Quick Summary

The principal theater for bankruptcy practice is the bankruptcy court. The bankruptcy court operates as "a unit" of the district court.¹ Although bankruptcy jurisdiction belongs to the district court, most matters are heard in bankruptcy court pursuant to a "standing order of reference" entered by each district court, which is a general order that automatically refers bankruptcy cases and related matters from the district court to the bankruptcy court. Sometimes (though rarely), the district judge hears bankruptcy matters in his own court.²

It is also possible for litigation that begins in state court (or another federal court) to end up in bankruptcy court. One or another of the parties may remove a matter from the non-bankruptcy court to the bankruptcy court if the matter is related to the bankruptcy case.³ The bankruptcy judge (or district judge) may remand a removed matter to non-bankruptcy court, or may abstain, sending the matter back.⁴ For example, a debtor might remove a pending state court breach-of-contract case to the district court for referral to the bankruptcy court, if he felt he could get a better result there. The bankruptcy judge might (but need not) remand it to state court, perhaps for reasons of comity or efficiency (e.g., the state judge has already learned the facts), or simply because he does not believe that he has any particular expertise with the issues, and already has enough work on his desk.

Appeals from the bankruptcy court generally will go to either the district court or a bankruptcy appellate panel (BAP), which is comprised of three bankruptcy judges from within the judicial circuit.⁵ Not every circuit has a BAP, and for those circuits that have a BAP, the district court judges for each district decide whether to authorize appeals from their district to go to the BAP, rather than to the district courts. Where there is a BAP and the district judges have authorized appeals to the BAP, appeals go automatically to the BAP unless the appellant or any other party to the appeal elects to have them heard by the district court.⁶ In addition, some bankruptcy appeals can skip the district court or the BAP and go straight to the circuit court of appeals.⁷ Finally, appeals from the district court or BAP go to the circuit courts of appeals and, ultimately, to the Supreme Court.

§ 3.4 ~ Jurisdiction Concepts

There is nothing especially arcane about bankruptcy procedure, but there is a fair amount of specialized jargon that is bound to be off-putting to the outsider. You will want to master these basic principles:

- Case vs. Proceeding. The bankruptcy "case" is the global bankruptcy that commences when a bankruptcy petition is filed — "In re DebtorCo." or whatever. The proceeding is a matter "arising under, arising in, or related to" the global case. The district court always has jurisdiction over the bankruptcy case (the statute says "original and exclusive"). The district court will have jurisdiction over a proceeding ("original but not exclusive") that arises under, arises in, or relates to the bankruptcy case.⁸ The bankruptcy court may have the power to do some of the things the district court may do, but not all. And the bankruptcy court never has the power to do any more than the district court can do.
- Adversary Proceeding vs. Contested Matter. Each of these is a proceeding in the sense that it is not a case. The adversary proceeding is the more formal of the two — a separate lawsuit within the bankruptcy case. The adversary proceeding begins with the filing of a complaint, much like an ordinary civil case. It gets its own case caption (naming the plaintiff and defendant) and docket number, and it functions under a specific set of adversary rules that generally mirror, or incorporate outright, the federal rules of civil procedure.⁹ A contested matter is a disputed matter that does not become a separate action like an adversary proceeding. Most of the time, you begin a "contested matter" by "motion," but in some courts you will still see an application or an order to show cause.¹⁰
- Core vs. Non-Core. As we explain more fully below, in 1982 the Supreme Court struck down the extant bankruptcy jurisdiction statute as unconstitutional on grounds that it reposed too much power in the bankruptcy judge.¹¹ Judges and administrators, scrambling to salvage bankruptcy jurisdiction, hit upon the notion that the bankruptcy judge might hear matters if she operated under the aegis of the district court. They reasoned that the bankruptcy judge might actually have the power to decide a matter if it were part of the core of the bankruptcy estate. If not part of the core, she might at least hear the matter, even if she does not finally decide it. The distinction is incorporated into the statute¹² and has been acknowledged, albeit with some important refinements, in recent Supreme Court decisions.¹³
- Arising-Under, Arising-in and Related-to Jurisdiction. As noted above, bankruptcy judges may hear and decide "core" matters. This includes matters "arising under" the Bankruptcy Code (proceedings created by or founded upon some provision in the Bankruptcy Code), and matters "arising in" the bankruptcy case (those relating to administration of the bankruptcy case but not founded upon an express provision in the Code). The category of matters that could have some impact upon the estate or its creditors, but are not "arising under" or "arising in" matters, are referred to as being within the "related to" jurisdiction of the bankruptcy court. Proceedings that do not affect the estate or its creditors are unrelated, and the bankruptcy court will have no jurisdiction over such matters.¹⁴

People sometimes treat the distinction between "related to" jurisdiction and "arising under" or "arising in" jurisdiction as if it were the same as the "core/noncore" distinction. Strictly speaking, this isn't quite right. Arising under, arising in, or related to goes to the nature of the district court's jurisdiction, while core/noncore goes to the question of whether the bankruptcy judge (as opposed to the district judge) can decide the matter. But some courts have held that "arising in" and "arising under" matters are all within the bankruptcy court's "core" jurisdiction and that "related to" matters are within the court's "noncore" jurisdiction.¹⁵ We can imagine exceptions to this rule, but as a starting point it is probably a reasonable assumption.

- Reference and Withdrawal. As we note above, the bankruptcy court is a unit of the district court. The bankruptcy judge has no power except insofar as a matter is referred to her from the district court. Referral is typically done by standing order, so bankruptcy matters go directly to the bankruptcy court as a matter of course. But the district judge may withdraw the reference at any time — either for a particular matter or for all matters, for any reason or (apparently) for no reason. There are certain matters with respect to which withdrawal of the reference is mandatory.¹⁶
- Other Ways to End Up in the District Court. If you start out in bankruptcy court, there are at least three ways in which you may wind up in district court. First, you may ask the district judge to "withdraw the reference" and take the matter back to the district court (but do not expect him to do it routinely). Second, if the bankruptcy judge enters a final judgment, you may have the right to appeal (but in some cases, the appeal may also go to the BAP or, on occasion, directly to the court of appeals).¹⁷ And third, in a case where the bankruptcy judge has the power to hear but not decide a matter, as in a noncore matter, you will go to the district court to get a final order after the bankruptcy judge has heard the matter and made proposed factual findings and legal conclusions for the district court to review.¹⁸
- Abstain and Remand. The judge exercising bankruptcy power may decide to abstain from hearing the bankruptcy case or some part of the case. Or he may remand a proceeding, once properly removed to the bankruptcy court, back to the originating state court. The principles governing discretionary abstention and remand are pretty much the same, and courts use similar factors in evaluating the two.¹⁹ In some cases, abstention is required. This applies only for cases:

1. involving state law;
2. that are within the bankruptcy court's "related to" jurisdiction;
3. where there is no other basis for federal jurisdiction; and
4. where the case was initially filed in state court and can be timely adjudicated in that

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