Article Iii and the "related To" Bankruptcy Jurisdiction: a Case Study in Protective Jurisdiction

• Publication year: 1987

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 11, No. 1FALL 1987

Article III and The "Related To" Bankruptcy Jurisdiction: A Case Study in Protective Jurisdiction(fn*)

Thomas Galligan, Jr. (fn**)

I. Introduction

The two most significant and well-known types of cases to which the federal judicial power extends under article III are cases arising under the Constitution, laws, or treaties of the United States and cases between citizens of different states.(fn1) The federal bankruptcy jurisdiction statutes provide for federal district court jurisdiction over all civil proceedings "related to cases under title ll."(fn2) The definition of a "related to" case apparently would include a state-created cause of action brought by the bankruptcy debtor against a non-diverse defendant. May a federal court take jurisdiction of such a case under the "related to" jurisdiction provision, or does article III deny the federal court the power to decide such a case? Put differently, as there is no diversity of citizenship between the parties in such a case, does it arise under the laws of the United States? An analysis of the "related to" jurisdiction shows that it is, in fact, a species of article III "arising under" jurisdiction that is referred to as protective jurisdiction.

Protective jurisdiction is present when in order to vindicate or protect federal interests or policies Congress decides to provide a federal forum but not a federal rule of decision for certain classes of cases.(fn3) In bankruptcy proceedings, there is a clear federal interest in providing a forum for all claims against the bankrupt debtor and all the debtor's claims, whether those claims are based on state law or federal law and whether or not the parties are diverse. This article contends that the most logically defensible explanation of protective jurisdiction relies upon articles I and III and upon the same political process that checks federal intrusion into state sovereignty in other areas. As long as Congress acts pursuant to a valid article I power and its means-a protective jurisdiction statute-are rationally related to its ends, then any case falling under the jurisdictional statute "arises under" federal law pursuant to article III. The controls on congressional usurpation of state power are article I, the case or controversy requirement of article III, and the political process.

This discussion has been raised in the wake of Northern Pipeline Construction Company v. Marathon Pipe Line Company,(fn4) in which the United States Supreme Court held(fn5) that a non-article III(fn6) "federal" judge could not decide purely state law claims where only appellate review of those decisions was available. In Marathon, plaintiff Northern Pipeline had filed a petition for reorganization under the federal bankruptcy laws.(fn7) Subsequently Northern filed an adversary proceeding against Marathon in the bankruptcy court, alleging state law causes of action for breach of contract, breach of warranty, misrepresentation, coercion, and duress. This proceeding was included in the bankruptcy court's statutory jurisdiction over claims "related to" bankruptcy.(fn8)

The defendant objected to the bankruptcy court's jurisdiction over the case. The defendant claimed that article III entitled it to a hearing before a federal judge with life tenure during good behavior and protection against salary diminutions.(fn9) The bankruptcy judge was not such an "article III" judge, therefore the bankruptcy judge could not constitutionally decide the case. The appellate review provided by the Bankruptcy Act of 1978 was insufficient to constitutionalize the statutory procedure.(fn10)

In holding that the bankruptcy court could not adjudicate the state law claims, the Court was not called upon to decide whether the federal district court itself could have constitutionally taken original jurisdiction of Northern's claim(fn11) because it was "related to" bankruptcy. The parties were diverse, so there was an independent basis for federal jurisdiction.(fn12) Thus, the Court did not decide whether an article III court would have constitutional competence to hear a case between a trustee, or debtor in possession, and a non-diverse third-party involving state law claims like those in Marathon.

In the wake of Marathon,(fn13) Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984, which once again gave the district court jurisdiction over all civil proceedings "related to cases under title ll."(fn14) The Act did attempt to rectify the Marathon problem; however, it did not resolve the question of the federal courts' constitutional competence.

The "related to" bankruptcy jurisdiction, when considered in connection with the discretionary and mandatory abstention provisions of the 1984 Bankruptcy Amendments and Federal Judgeship Act,(fn15) appears to be a constitutional effort to protect the federal interest in efficient bankruptcy administration, and at the same time preserve the states' interests in interpreting, applying, and developing state law. This balance between state and federal interests reflects the viability of the political process as a meaningful control on congressional power.

Section II of this paper briefly sets out the jurisdictional scheme of the 1984 Act. Section III presents and describes the argument that the "related to" bankruptcy jurisdiction is unconstitutional. Statements in the legislative history indicate that some legislators believed it would be unconstitutional for a federal court to take jurisdiction in a non-diversity case with Marathon-type state law issues.(fn16) Several cases have adopted this reasoning and have held that in order for a federal court to have "related to" bankruptcy jurisdiction there must be an independent basis for federal jurisdiction.(fn17)

The Supreme Court cases supporting "related to" jurisdiction are set out in section IV. Section V examines the "original ingredient" theory of Osborn v. Bank of the United States(fn18) and discusses pendent and ancillary jurisdiction as bases for the "related to" jurisdiction. Although courts that uphold "related to" jurisdiction reach the correct result, justifying the federal court's "related to" bankruptcy jurisdiction on grounds of pendent or ancillary jurisdiction strains those concepts as we know them.(fn19)

Section VI discusses various theories of protective jurisdiction, articulates the most persuasive of those theories, and explains how the political process is the most acceptable check on federal power when protective jurisdiction is involved. Section VII reexamines the "related to" bankruptcy jurisdiction in the context of the political process check on protective jurisdiction, concluding that the compromise Congress reached between federal and state interests in the 1984 Act shows that the political process can function as a meaningful check on federal intrusion into state judicial sovereignty. Section VIII contains some brief conclusory remarks.

II. The "Related To" Bankruptcy Jurisdictional Scheme

In 1978, Congress greatly expanded the jurisdiction of both the district courts and the bankruptcy "courts." Congress hoped to limit what it believed was unnecessary litigation over jurisdiction and also to streamline and reduce the costs of the bankruptcy process.(fn20) Congress granted the bankruptcy court jurisdiction over "all civil proceedings arising under title 11 [the Bankruptcy title] or arising in or related to cases under title ll."(fn21) As the legislative history shows, this jurisdiction might include almost any type of lawsuit such as contract, tort, labor, and antitrust, as well as more common bankruptcy disputes.(fn22)

As part of its decision that Congress had unconstitutionally delegated federal judicial power to non-article III judges in the 1978 Bankruptcy Act, the Marathon Court held the entire jurisdictional statute unconstitutional. In a footnote to his plurality opinion, Justice Brennan refused to hold that the Act was severable.(fn23) He did not believe that Congress, in light of the Court's decision, would have preferred to route claims like those at issue in Marathon through the district court rather than the bankruptcy court.(fn24) Brennan did not believe that Congress lacked the constitutional power to confer such jurisdiction on federal courts, but rather that Congress should bear the burden of restructuring the bankruptcy courts itself.(fn25)

In response to Marathon, the House proposed to make all bankruptcy judges life-tenured article III judges.(fn26) At the urging of the district judges, the Senate proposed greater district court supervision over "related to" bankruptcy matters without unduly swelling the ranks of the federal judiciary by making all bankruptcy judges article III judges.(fn27) While Congress bantered these proposals about, it allowed two stays of the Supreme Court's Marathon decision to pass, and left itself in a curious position: failure to enact new bankruptcy legislation by December 24, 1982, would call all bankruptcy jurisdiction into question.(fn28)

The logical response, curative legislation from Congress, was not forthcoming. Instead, the Director of the Administrative Office of United States Courts prepared and issued an emergency rule,(fn29) which all the district courts adopted with minor local variations. Pursuant to the emergency rule...