Core and Non-Core Proceedings in Bankruptcy Litigation: What Is the Difference and Why Does It Matter?

In some bankruptcy cases, issues arise that are not directly related to the bankruptcy but must be resolved before the bankruptcy court can finalize the bankruptcy case itself. When that situation occurs, the legal distinction between core proceedings and non-core proceedings in bankruptcy litigation becomes important.

Authority of U.S. Bankruptcy Courts

U.S. bankruptcy courts have limited jurisdiction. They are subject to the overarching authority of federal district courts on bankruptcy matters.

The authority of bankruptcy courts relates primarily to issues arising under Title 11 of the U.S. Code, which is the U.S. Bankruptcy Code. A separate federal statute that establishes the authority of the bankruptcy courts distinguishes between core proceedings and non-core proceedings in a bankruptcy case.

Under the law, a bankruptcy judge has authority to hear and determine core proceedings. The bankruptcy court may — or may not — have authority to determine a specific non-core proceeding.

Federal Law on Core and Non-Core Bankruptcy Proceedings

The relevant section of federal law, 28 U.S. Code § 1334, does not define core and non-core proceedings. It does, however, give a non-exclusive list of 16 types of core proceedings. The list includes, but is not limited to:

• Matters concerning administration of the bankrupt estate
• Allowance or disallowance of claims or exemptions
• Counterclaims by the debtor
• Proceedings relating to avoidable preferences
• Matters relating to dischargeability of a debt
• Objections to discharge
• Proceedings relating to fraudulent conveyances

Generally, a core proceeding relates to issues that arise under the U.S. Bankruptcy Code. In contrast, a non-core proceeding addresses an issue that does not relate to Bankruptcy Code matters directly and does positively or negatively affect the debtor’s rights and liabilities or administration of the bankruptcy estate.

Stated another way, core issues are matters arising under the Bankruptcy Code that relate directly to the bankruptcy. Non-core matters do not involve the bankruptcy itself but affect the outcome of the bankruptcy case.

The statute gives bankruptcy courts authority to determine core proceedings. For non-core proceedings, the bankruptcy judge has authority to hear non-core proceedings and submit proposed findings of fact and conclusions of law to the federal district court. The law does not define or provide examples of non-core proceedings. However, the law states that personal injury and wrongful death claims must be tried in federal district court — so they are non-core proceedings that a bankruptcy court may not determine under any circumstances.

The law also allows the district court to refer a non-core proceeding to the bankruptcy court for decision when the parties consent. In non-core proceedings, the district court also may authorize the bankruptcy judge to conduct a jury trial on consent of the parties.

Non-Core Proceedings in a Bankruptcy Case

In a bankruptcy case, it sometimes is necessary for non-core issues to be resolved before the bankruptcy judge can finalize the bankruptcy case. Non-core proceedings typically relate to rights of people involved in the bankruptcy that could be resolved independently of the bankruptcy case. They often (but do not necessarily) involve matters that could be resolved in state court. Examples include:

• Business torts
• Breach of contract disputes
• Lien disputes between creditors
• Civil fraud actions

When a bankruptcy case involves a combination of core and non-core issues, the bankruptcy judge determines which issues are core and which are not. Identifying a proceeding as core or non-core is not always a simple matter.

If a bankruptcy case involves non-core issues, the bankruptcy judge applies the law and determines whether the bankruptcy court will address those issues. If parties disagree about whether a bankruptcy court should decide a particular matter as core or non-core, that issue itself may end up being litigated.

Application of the Non-Core Statutory Provisions

The statutory provisions relating to core and non-core proceedings in a bankruptcy case caused legal confusion for many years. Considerable litigation resulted. In 2015, the United States Supreme Court clarified the distinction between core and non-core proceedings in the case of Wellness International Network, Ltd. v. Sharif (135 S. Ct. 1932). This decision resolved questions raised by the earlier Supreme Court decision in Stern v. Marshall (564 U.S. 462) in 2011, which contributed significantly to all the confusion.

The bankruptcy judge always has jurisdiction to decide core proceedings in a bankruptcy case. If a bankruptcy case involves a non-core proceeding, the bankruptcy judge may resolve the non-core issues only if the parties consent. Absent consent and for some specific types of non-core issues, the bankruptcy judge may decline to hear the non-core matter or submit proposed findings of fact and conclusions of law to the federal district court, which conducts a de novo review of the non-core proceeding.

Some non-core matters relate so remotely to a bankruptcy case that a bankruptcy judge will not hear them under any circumstances. Examples of these types of issues include divorce, child custody, and probate matters. As noted previously, a bankruptcy judge also does not have authority to determine personal injury and wrongful death claims.

Bankruptcy Litigation Involving Non-Core Issues

Bankruptcy litigation generally involves adversary proceedings that address core issues in a bankruptcy case. This separate litigation occurs within the bankruptcy case and requires legal counsel from an attorney experienced in bankruptcy litigation.

In bankruptcy cases where non-core issues exist, several different disputes between the parties may result. Issues for the bankruptcy court to address may include: (1) Whether a matter is core or non-core, (2) Whether the bankruptcy judge has authority over the non-core issue, (3) Resolution of the non-core proceeding itself.

Under revised Federal Rules of Bankruptcy Procedure effective on December 1, 2016 (F.R.B.P. 7008 and 2012(b)), a party involved in an adversary proceeding makes the decision to give or withhold consent to having the bankruptcy judge decide non-core issues in the first pleading or response in the adversary proceeding. In some cases, giving or withholding consent for the court to determine non-core issues may provide a party with substantial leverage in the litigation. As such, it is critical for any party bringing or defending against an adversary proceeding in a bankruptcy case to consult with a knowledgeable bankruptcy litigation attorney at before filing a pleading or response in the bankruptcy case.

Talk With an Experienced Minnesota Bankruptcy Litigation Attorney

Bankruptcy litigation is a primary focus of my practice at the Dave Burns Law Office. I represent creditors and debtors in all types of adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul.

If you face any type of potential litigation in a bankruptcy case, I welcome you to contact me at (612) 677-8351 or by sending an email to me at dave@daveburnslaw.com. I am available to meet with clients in both Minneapolis and St. Paul and welcome inquiries from clients and referring attorneys throughout the State of Minnesota.