Bankruptcy Court Jurisdiction Over Litigation

Bankruptcy court jurisdiction extends beyond litigation arising as adversary proceedings in the bankruptcy case itself. However, there are limits on the extent of that jurisdiction. Questions regarding the jurisdiction of bankruptcy courts often raise extremely complicated legal issues.

Federal Statutes on Bankruptcy Court Jurisdiction

Unlike United States district courts and other courts created under Article III of the United States Constitution, bankruptcy courts are not constitutionally-created courts. Bankruptcy courts exist under federal statutes, which define their jurisdiction.

Under 28 U.S.C. § 1334, federal district courts have jurisdiction over cases under the United States Bankruptcy Code. A different statutory provision, 28 U.S.C. § 157, authorizes federal district courts to refer cases arising under the Code to bankruptcy courts in the district. Under Section 157(a), referrals may include all cases under the Code and proceedings “arising under” the Code as well as proceedings “arising in or related to a case” under the Code.

Section 157(b) provides that bankruptcy judges may hear and determine all cases under the Bankruptcy Code referred by district courts and all core proceedings arising under the Code or arising in a case under the Code. The section goes on to define core proceedings. Our previous blog post, Core and Non-Core Proceedings in Bankruptcy Litigation: What Is the Difference and Why Does It Matter?, discusses the topic of core proceedings in detail.

Sections 157 and Section 1334 include provisions relating to abstention by district courts and bankruptcy courts in specific cases. Abstention is a doctrine designed to resolve conflicts between federal and state court jurisdiction based on the principle of comity.

In some situations, abstaining from the exercise of jurisdiction by a district court or bankruptcy court is discretionary, but in other circumstances, it is not. Mandatory abstention applies to certain non-core proceedings in a bankruptcy case. Permissive abstention is available for core proceedings as well, when it is “in the interest of justice, or in the interest of comity with State courts or respect for State law” under Section 1334(c)(1). Jurisdictional issues and questions relating to abstention that arise in a bankruptcy case frequently are legally complex.

Litigation Related to a Bankruptcy Case

While it is clear that bankruptcy courts have jurisdiction over adversary proceedings that arise in a bankruptcy case, questions concerning bankruptcy court jurisdiction often occur when non-core litigation doesn’t arise as part of the bankruptcy case but rather may be “related to” it, triggering bankruptcy court jurisdiction under the federal statutory provisions.

In addressing the question of whether non-core litigation meets the statutory requirement of being “related to” a bankruptcy matter for purposes of bankruptcy court jurisdiction, the Eighth Circuit Court of Appeals applies a “conceivable effect” test. Minnesota is part of the Eighth Circuit and governed by that Court’s decisions.

A line of decisions in the Eighth Circuit establishes the conceivable effect test. Under the test, an action is “related to” a bankruptcy case if the litigation could alter the debtor’s liabilities or rights and affects administration or handling of the bankruptcy estate in any way. Stated conversely, if the litigation does not have an effect on the bankruptcy estate, it is not related, and the bankruptcy court does not have jurisdiction.

An Eighth Circuit Bankruptcy Appellate Panel affirmed the conceivable effect approach in a recent decision, In re: Kent McDougall, No. 17-6028, July 9, 2018. In that case, the Panel ruled that a state law fraud claim, which was raised by a third party and concerned the validity of a lien, did not invoke “arising under” or “arising in” jurisdiction of the bankruptcy court. The Panel stated further that the claim was not “related to” the bankruptcy case since it would have no conceivable effect on the bankruptcy matter. As such, there was no basis for jurisdiction of the bankruptcy court over the state law fraud claim.

Determining Jurisdiction of a Bankruptcy Court

When issues occur over jurisdiction of the bankruptcy court in a particular bankruptcy matter, determination of jurisdiction depends on application of the federal statutory provisions, previous binding court decisions, and the Federal Rules of Bankruptcy Procedure. Conducting that analysis requires assistance from an experienced bankruptcy litigation attorney.

While some bankruptcy lawyers (attorneys who assist with filing for bankruptcy) may address separate actions that occur during a bankruptcy case, many do not. A bankruptcy litigation lawyer is one who focuses specifically on separate litigation in a bankruptcy case and has the special knowledge and skill necessary to address the complex legal issues presented by separate legal actions in a bankruptcy matter.

Talk With an Experienced Minnesota Bankruptcy Litigation Attorney

At the Dave Burns Law Office, I represent creditors and debtors in bankruptcy litigation matters in the United States Bankruptcy Courts in Minneapolis and St. Paul, including situations that pose questions relating to the jurisdiction of the bankruptcy court. Bankruptcy litigation is a central focus of my practice.

If you face or are considering filing any type of separate legal action 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.