On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory

Article excerpt

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. …