On the nature of federal bankruptcy jurisdiction: a general statutory and constitutional theory.

• Author: Brubaker, Ralph

The words we have to construe are not only words with a history. They express an enactment that is part of a serial, and a serial that must be related to Article III of the Constitution, the watershed of all judiciary legislation, and to the enactments which have derived from that Article.... These give content and meaning to its pithy phrases [and] must be considered [as] part of an organic growth--part of the evolutionary process of judiciary legislation that began September 24, 1789, and projects into the future.

Justice Frankfurter in Romero v. International Terminal Operating Co.([dagger])

INTRODUCTION

Consumer debtors seeking relief from a federal bankruptcy court now number well in excess of one million per annum, and another two million individuals are employed by businesses filing for the bankruptcy protection of a federal court.(1) Bankruptcy, therefore, is a substantial and significant component of the charge of the federal courts. Yet, the jurisdiction in bankruptcy remains one of the most enduring puzzles of our federal court system.(2) Congress, of course, has plenary legislative power "on the subject of Bankruptcies."(3) For the most part, however, creditors' and debtors' rights and obligations in bankruptcy are governed by state law, not federal law.(4) For example, a creditor may assert a right to payment from a debtor founded upon a disputed state-law cause of action. Likewise, among the debtor's assets, to which the creditors lay claim, may be similar state-law causes of the debtor against others. Bankruptcy brings all such state-law disputes into federal court, but without any diversity-of-citizenship requisite, and thus, the constitutional source of this federal "judicial Power"(5) is not at all self-evident. The Supreme Court consistently has confirmed the propriety of the federal jurisdiction in bankruptcy, but has been cryptic, parsimonious, and inconsistent in its explanations of this judicial province.(6)

The Supreme Court's abstruseness is, of course, fuel for the scholarly engine, and bankruptcy has become the seemingly inscrutable crucible of federal jurisdiction theory. In fact, because it is not easily explained by traditional theory, most scholars rely upon bankruptcy to buttress novel and unconventional departures that would accommodate the apparent anomaly of federal bankruptcy jurisdiction.(7) These efforts, however, have not grappled with the parallel and equally bedeviling problem of charting the outermost bounds of the statutory grant of federal bankruptcy jurisdiction, which contemplates a federal forum for any proceeding "related to" a bankruptcy case.(8) This provision for pervasive federal bankruptcy jurisdiction is the most extensive in our history, and indeed, was designed to be as broad as the Constitution permits.(9) The extant jurisdictional structure, therefore, provides a contextual framework that proves critical for testing constitutional theories of federal bankruptcy jurisdiction.

In the absence of clear constitutional guidance, jurisprudential demarcation of the content of the statutory grant, not surprisingly, has been chaotic. In fact, the case law has developed in a vacuum-like separation from constitutional principles that would define the reach of federal bankruptcy jurisdiction.(10) This disconnect is aggravated by the literal breadth of the statute itself, which on its face extends to any dispute, even one wholly between third parties and not directly involving the debtor nor the debtor's bankruptcy estate, but that nonetheless is in some manner "related to" the debtor's bankruptcy case. The dominant test for "related to" bankruptcy jurisdiction in such a third-party dispute, the so-called Pacor test,(11) merely asks "whether the outcome of that [third-party] proceeding could conceivably have any effect on the estate being administered in bankruptcy."(12)

When one ponders such an approach to third-party "related to" bankruptcy jurisdiction for an operating business attempting reorganization in Chapter 11 bankruptcy proceedings, the prospect of potentially limitless federal bankruptcy jurisdiction is not beyond the pale. As one court noted when asked to pass on the validity of IRS liens on the property of certain third parties, because the Chapter 11 debtor anticipated using that property to help finance its reorganization:

The desires of every Chapter 11 debtor are affected by a myriad of external indirect effects created by the circumstances in which it operates[,] [w]hether they arise from the ebbs and flows of commerce, the effects of governmental action or the acts of third parties with respect to property of nondebtors, [all having some] impact on a debtor's attempt to reorganize....(13) Thus, the pressures pushing at the edges of federal bankruptcy jurisdiction are immense, and even more so as federal bankruptcy proceedings rapidly assume great importance in the larger scheme of federal jurisdiction and dispute resolution in general, especially in confronting the difficulties of complex litigation such as mass torts.(14)

The Supreme Court highlighted the challenge presented by "related to" bankruptcy jurisdiction over third-party disputes in Celotex Corp. v. Edwards,(15) decided in the Chapter 11 reorganization proceedings of Celotex Corp.--one of many asbestos manufacturers whose massive potential liability for asbestos-related personal injuries precipitated a Chapter 11 filing.(16) In that case, the Court stated that "Congress did not delineate the scope of `related to' jurisdiction, but its choice of words suggests a grant of some breadth," while cautioning that "a bankruptcy court's `related to' jurisdiction cannot be limitless."(17) The Court noted that nearly all circuits have embraced the Pacor test,(18) but (wisely) did not find it necessary to adopt any particular test in order to decide the case before it.(19) Pacor is manifestly inadequate, as it simply provides no principled limits for third-party "related to" bankruptcy jurisdiction. The issue of the outermost bounds of federal bankruptcy jurisdiction is rife with litigation, and scores of circuit court opinions have done virtually nothing to clarify the appropriate jurisdictional standards. In fact, Pacor has produced a state of affairs in which jurisdictional determinations are essentially arbitrary--with countless instances of identical factual and procedural postures producing diametrically disparate results on nominal application of the same "test."(20)

The daunting disarray of the case law cries out for a new approach, and this Article proffers a comprehensive, unifying statutory and constitutional theory that would vastly simplify and bring principled limits to third-party "related to" bankruptcy jurisdiction. Given the intended expanse of that provision, the limits of "related to" bankruptcy jurisdiction are constitutional limits. The search for a sensible solution to the statutory conundrum of federal bankruptcy jurisdiction, therefore, becomes meaningful only if it is explicitly coupled with a coherent constitutional explanation for our federal bankruptcy jurisdiction--an explanation that has eluded both courts and scholars. This interpretive method will succeed, of course, only if it is, in fact, possible to formulate a determinate constitutional theory of federal bankruptcy jurisdiction, and this Article undertakes that task.

How, then, do we ascertain the boundaries of a statutory bankruptcy jurisdiction that admits of no limits other than those imposed by constitutional principles of judicial federalism, when the essence of our federal bankruptcy jurisdiction seems to defy the logic of those constitutional standards? This Article heeds the sage counsel gleaned from the opening salvo to Justice Frankfurter, and therefore, approaches interpretation of the grant of federal bankruptcy jurisdiction as a multifaceted historical inquiry that must begin by exploring statutory antecedents. From this historical understanding, we then can fashion a reconciliation with the Constitution's provisions for federal judicial power and comparable congressional conferrals of the same. The result is a comprehensive theory of federal bankruptcy jurisdiction that integrates constitutional theory with an interpretive theory for the bankruptcy jurisdiction statute.

To that end, Part I traces the historical evolution of the scope of federal bankruptcy jurisdiction. This historical survey reveals the backdrop of an English model of bankruptcy jurisdiction, against which a unique American conception of federal bankruptcy jurisdiction competed and ultimately prevailed. Pursuant thereto, a general grant of federal jurisdiction over "bankruptcy proceedings" brought the federal judicial power to bear on any dispute to which a bankruptcy estate was a party. In addition to this general federal bankruptcy jurisdiction over all claims by and against a bankruptcy estate, the historical inventory of Part I also discloses settings in which federal bankruptcy jurisdiction extended to incidental disputes through principles of supplemental jurisdiction. The origins of supplemental bankruptcy jurisdiction include perhaps the earliest instance of an express congressional grant of supplemental jurisdiction, which created a federal bankruptcy jurisdiction in certain third-party disputes necessary to the administration of a bankruptcy estate. In the current jurisdictional statute, Congress consciously designed as broad a federal bankruptcy jurisdiction as imaginable. Yet, the assumption that there must be some constitutional limit to federal bankruptcy jurisdiction has left the courts groping to find the perimeter of third-party "related to" bankruptcy jurisdiction, but without a constitutional compass.

Part II relies upon the sum total of our historical experience with federal bankruptcy jurisdiction to construct a constitutional theory. An approach grounded in the Article I Bankruptcy Power is...