Limitations upon a Bankruptcy Court’s Subject Matter Jurisdiction to Determine a Debtor’s Class Action Lawsuit

by Wendell H. Adair, Jr., Kristopher M. Hansen, Kenneth Pasquale, Claude G. Szyfer

Dec 1, 2000

(TMA Global)

The limited reach of a bankruptcy court’s subject matter jurisdiction has been recognized ever since Congress amended the Bankruptcy Code in response to the Supreme Court’s decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which found unconstitutional Congress’ attempt to confer the full breadth of the district court’s original and exclusive bankruptcy jurisdiction upon the bankruptcy courts. Recently, the restrictions upon a bankruptcy court’s jurisdiction have been stretched by certain courts faced with consumer protection class action lawsuits. The issue arises when a debtor in an individual bankruptcy case commences a class action lawsuit within that case on behalf of a putative class of debtors, which gives rise to the question of whether the bankruptcy court has subject matter jurisdiction over the debtor’s class claims—especially when the absent class members are not debtors before that court. The bankruptcy courts that have addressed the issue are split in their answers, but the better argument appears to be that a bankruptcy court lacks jurisdiction to hear such debtor’s class actions.

Subject Matter Jurisdiction of the Bankruptcy Court

The jurisdiction of the bankruptcy court, like that of any other federal court, is limited by statute. Section 1334(b) of Title 28 provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11." [1] The district courts may, in turn, refer "any or all proceedings arising under title 11 or arising in or related to a case under title 11…to the bankruptcy judges for the district." [2]

Section 157 does not provide the bankruptcy courts with the full authority over all matters as to which a district court may exercise jurisdiction under Section 1334.[3] Section 157 differentiates between "core" and "non-core" proceedings. Pursuant to 28 U.S.C. §157(b)(1), a bankruptcy judge "may hear and determine all…core proceedings arising under title 11…and may enter appropriate orders and judgments, subject to review [under 28 U.S.C. § 158]." Section 157(b)(2) contains a non-exclusive list of "core proceedings." [4] To determine whether a proceeding is core, a court must examine whether "the nature of th[e] adversary proceeding, rather than the state or federal basis for the claim, falls within the core of federal bankruptcy power." [5] In other words, a core proceeding, "for bankruptcy jurisdictional purposes, is [an] action that has as its foundation the creation, recognition, or adjudication of rights which would not exist independent of a bankruptcy environment." [6]

Bankruptcy courts may exercise subject matter jurisdiction over core claims that "arise under" or "arise in" a bankruptcy case. A bankruptcy court will also have subject matter jurisdiction over those non-core proceedings that "relate to" a bankruptcy case. [7] A civil proceeding is "related to" a bankruptcy case, for jurisdictional purposes, when the action between the parties affects how much property is available for distribution to creditors of the bankruptcy estate or allocation of property among such creditors, or if the outcome could alter the debtor’s rights or liabilities. [8] "Related to" jurisdiction is limited, and bankruptcy courts lack jurisdiction over matters which will have no effect upon the debtor’s estate. [9]

Subject Matter Jurisdiction over a Debtor’s Class Action

One of the first cases to apply these basic jurisdictional tenets to determine whether jurisdiction exists to hear a debtor’s class action was Aiello v. Providian Financial Corp. (In re Aiello), 231 B.R. 693 (Bankr. E.D.Ill. 1999), in which the bankruptcy court held that subject matter jurisdiction existed over the debtor’s nationwide class allegations. There, the bankruptcy court held that jurisdiction existed because the named debtor’s claim for violation of the automatic stay constituted a "core matter" under the Bankruptcy Code. [10] The Aiello court held that the debtor’s class claims were core and thus rejected the defendants’ argument that the bankruptcy court’s jurisdiction was dependent upon whether the class action could have an effect upon the named debtor’s estate. To the court, that test was relevant only to a determination whether the court had jurisdiction to hear a non-core, "related to" matter:

By its very definition, ‘related-to’ jurisdiction only applies in non-core matters as an alternative basis of jurisdiction. It assumes that the matter does not ‘arise in’ the case at hand and therefore it requires some other nexus vis-a-vis the estate involved. Such a nexus, however, is not required when the Court is interpreting fundamental provisions of the Bankruptcy Code as to all of the class members. There is no basis for artificially limiting core jurisdiction in debtor class actions to "related-to’ situations. [11]

In Williams v. Sears, Roebuck & Co., 244 B.R. 858 (Bankr. S.D. Ga. 2000), the bankruptcy court rejected the rationale of Aiello in determining whether it had jurisdiction to determine a debtor’s proposed nationwide class action against Sears that alleged violations of the discharge and automatic stay provisions of the Bankruptcy Code, as well as violating the Truth in Lending Act, 15 U.S.C. § 1601 et seq. Although recognizing that, "[a]t first blush, it would appear that the class action is the perfect procedural device to remedy systematic, widespread violations of law by a single defendant, especially where the damage resulting from such illegal conduct is presumably dispersed over a large number of individuals, thereby reducing the incentives that any individual plaintiff might have to bring suit against the wrongdoer," the Williams court also acknowledged that the distinguishing fact is that "here the class is comprised of debtors, each of whom has his own unique bankruptcy case." [12]

The Williams court cited to the handful of cases that previously addressed the jurisdictional issue and found that the courts were "reticent to exercise jurisdiction over a claim seeking relief on behalf of a class of debtors in bankruptcy against a single creditor." [13] Holding that the named plaintiff’s claims before it were plainly core and that, just as plainly, the claims would have no effect upon that plaintiff’s estate, the court narrowed the issue to "whether bankruptcy jurisdiction over the claims asserted by Plaintiff on behalf of the putative class of debtors exists simply because the claims ‘arise under’ the Bankruptcy Code, although the claims clearly do not ‘relate to’ Plaintiff’s bankruptcy case." [14] The court rejected the holding in Aiello, noting that:

The statutory definition of ‘core proceeding’ clearly implicates matters concerning the estate of a bankrupt. The drafters of § 157 would probably be surprised to hear of a court that deemed a proceeding to be a ‘core bankruptcy proceeding’ without, at the same time, finding that the proceeding related to the bankruptcy estate of the debtor. [15]

Surprisingly, the Williams court concluded that although it lacked subject matter jurisdiction to determine claims on behalf of a nationwide class of debtors, it did have jurisdiction to hear the claims of that portion of the class that were debtors in cases within the district in which the court sat. [16] That holding, however, is inconsistent with the court’s own analysis and holding that a claim raised in a bankruptcy court must have some effect upon the named debtor’s bankruptcy estate in order for the bankruptcy court to have jurisdiction over that claim. Indeed, if the action does not involve property of the estate, then not only is it a noncore proceeding, it is an unrelated matter completely beyond the bankruptcy court’s subject matter jurisdiction. This can be gleaned from a general principle of bankruptcy law: if the resolution of litigation cannot affect the administration of the estate, the bankruptcy court does not have jurisdiction to decide it. [17]

Thus, whether or not the absent class members are debtors in bankruptcy cases within the same district, the exercise of jurisdiction upon the claims of absent class members cannot involve the administration or property of the named debtor’s estate and, therefore, subject matter jurisdiction is entirely lacking.

The bankruptcy court in Noletto [18] engaged in a thorough discussion of statutory interpretation and legislative history in holding that it had jurisdiction over a case involving a putative nationwide debtor’s class action that asserted claims for alleged violations of the bankruptcy laws. Defendants argued that both the bankruptcy court and the district court lacked jurisdiction over the class claims. [19] The Noletto court found that the claims were core because they related only to the bankruptcy laws and accordingly, like the Aiello court before it, rejected defendants’ contention that jurisdiction was lacking because the claims did not "relate to" the bankruptcy cases of other debtors. The court also found that although § 157(b)(2) uses the singular terms "estate" and "a case," that statute does not provide an exclusive list of core proceedings, and that a claim could be core under § 28 U.S.C. § 157(b)(2) so long as it concerned the administration of a debtor’s estate, not necessarily the estate of the debtor asserting the class claims. [20] The court conceded that it "found no evidence that debtor class actions were envisioned by the drafters," but dismissed that point because "the jurisdictional statutes were written in a manner to cover even those actions." [21]

Other bankruptcy courts have expressly recognized their limited jurisdiction in holding that they lack jurisdiction over a debtor’s class action because the claims of the absent class members cannot affect the property of the named debtor’s bankruptcy case. For example, the court in Knox[22] dismissed a class action complaint brought by a Chapter 13 debtor who alleged that the creditor-defendant’s practice of submitting inflated secured claims in Chapter 13 cases violated both state and federal law. The plaintiff in Knox asserted claims on behalf of putative class members alleged to be similarly situated debtors in other bankruptcy cases, both in the forum district as well as all other judicial districts. The bankruptcy court held that no core jurisdiction "lies in this bankruptcy case over such claims. Moreover, class claims for monetary recovery could only benefit the class members, but could not affect the amount of property available for distribution in Knox’s case and thus could not affect allocation of property among Knox’s creditors. This Court is not a forum for recovery of money that cannot be part of the bankruptcy estate of this Debtor." [23] The Knox court also held that "related to" jurisdiction did not lie for the asserted class claims because the resolution of the class claims could have absolutely no effect on the amount of property available for the class representative’s estate or to be distributed to the class representative’s creditors. [24]

Similarly, in Lenior v. GE Capital Corp. (In re Lenior), [25] the bankruptcy court held that it lacked subject matter jurisdiction over the Chapter 13 debtor’s class claims that GE Capital Corp. had improperly filed inflated proofs of claim, thus violating Section 105 of the Bankruptcy Code and New York General Business Law § 345. Conducting the same analysis as the court in Knox, the Lenior court concluded that it did not have subject matter jurisdiction over the class claims because those claims would not affect the amount of property available for distribution in the Plaintiff’s estate. [26]

Conclusion

The decisions in cases like Aiello expand the jurisdictional scope of the bankruptcy courts beyond that which Congress authorized. The issue is not whether the test for "related to" jurisdiction must be satisfied even when the claims at issue are core, but rather whether a debtor’s putative class claims, even those which are solely core, must have a conceivable effect upon the named debtor’s estate. To answer that question in the negative ignores the fact that absent some effect upon the estate of the debtor, there is no bankruptcy issue at stake at all in that case and no reason for the bankruptcy court to hear the issue. If a debtor is damaged by a particular defendant’s actions, the remedy is to assert an individual claim in that debtor’s bankruptcy case that will, by definition, have a potential effect upon the estate. Asserting that claim as a class claim does nothing to advance the purposes of the bankruptcy laws.

Even were it assumed that a class action is an otherwise appropriate vehicle to address the systematic illegal actions of a defendant, the efficiency of the procedure is not relevant to the jurisdictional question. Indeed, "[a] procedural rule such as Rule 23 authorizing class actions, of course, cannot be read as enlarging the limited jurisdictional grant of § 1334." [27] Yet, those courts that have found that jurisdiction exists over a debtor’s class action have done just that, expanding the jurisdiction of the court beyond its constitutional limitations.
________________________________________________

[1] 28 U.S.C. §1334(b) (1999).

[2] 28 U.S.C. § 157(a) (1999).

[3] See Knox v. Sunstar Acceptance Corp. (In re Knox), 237 B.R. 687, 693 (Bankr. N.D. Ill. 1999); Sturman v. Southeast Partners Corp. (In re Sturman), 222 B.R. 694, 716-17 (Bankr. S.D.N.Y. 1998).

[4] 28 U.S.C. § 157(b)(2) (1999).

[5] In re Manville Forest Products Corp., 896 F.2d 1384 (2d Cir. 1990); In re Shea & Gould, 198 B.R. 861, 866 (Bankr. S.D.N.Y. 1996).

[6] Geron v. Schulman (In re Manshul Constr. Corp.), 225 B.R. 41, 45 (S.D.N.Y. 1998).

[7] Geron, 225 B.R. at 45.

[8] Id.; Knox¸ 237 B.R. at 693 .

[9] Geron, 225 B.R. at 45 .

[10] Id. at 703-04. Although the Aiello court held that it had jurisdiction over the class issues, it also concluded that the debtor’s proposed class could not be certified pursuant to Fed. R. Civ. P. 23 and Fed. R. Bank. P. 7023 because the plaintiff could not satisfy the numerosity, commonality and typicality requirements of the statute.

[11] Id. at 705 (citation omitted). The Aiello court distinguished a number of cases that held that jurisdiction was lacking over a debtor’s class action, because each of those cases involved state law claims, and thus the bankruptcy court’s non-core "related to" jurisdiction. The Aiello court seemed to concede that the bankruptcy court would lack jurisdiction over state law class allegations asserted on behalf of a proposed debtor’s class. Id. at 704-05. See also Noletto v. Nationsbanc Mortgage Corp. (In re Noletto), 244 B.R. 845 (Bankr. S.D. Ala. 2000) (holding that bankruptcy jurisdiction exists over claims of a putative nationwide class because the claims asserted were core, and thus the test for "related to" jurisdiction was inapplicable).

[12] Id. at 862.

[13] Id. at 862-63.

[14] Id. at 865 .

[15] Id. at 865, n.8.

[16] Id. at 868.

[17] Gallucci v. Grant (In re Gallucci), 931 F.2d 738, 742 (11th Cir. 1991) (notwithstanding that turnover proceedings were "ordinarily…core proceedings within the jurisdiction of a bankruptcy court," the Bankruptcy Court and District Court had both erred in exercising jurisdiction over the proceeding because the turnover did not involve property of the debtor’s estate); Gordon v. Shirley Duke Assocs., A.P.I. (In re Shirley Duke Assocs.,), 611 F.2d 15, 18 (2d Cir. 1979) (same); In re S & S 31 Flavors, Inc., 118 B.R. 202, 204 (Bankr. E.D.N.Y. 1990) (same).

[18] 244 B.R. 845.

[19] The argument that the district court lacked jurisdiction is faulty. The jurisdictional issue arises in the bankruptcy court because of the limitations upon that court’s jurisdiction; to the contrary, the district court has "original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11." 28 U.S.C. §1334(b) (1999). Accordingly, a district court can hear any and all bankruptcy claims, but a bankruptcy court’s jurisdiction is limited to those that "arise in, "arise under" and "relate to" a bankruptcy case.

[20] Id. at 856.

[21] Id. at 850; see also Tate v. NationsBanc Mortgage Corporation (In re Tate), Nos. 97-32126, 97-3725, 97-32344, 97-3724, 2000 WL 1520758 (Bankr. W.D.N.C. Oct, 2, 2000) (following Noletto and Williams in holding that the bankruptcy court has jurisdiction over a class of debtors with bankruptcy cases within the district in which the court sits). The Tate court opined that Fed. R. Bank. P. 7023 would be rendered meaningless if a bankruptcy court lacked jurisdiction over a debtor’s class action. 2000 WL 1520758 at *8. However, there is no question that "Rule 23 F. R. Civ. P. applies in adversary proceedings" because creditor class actions may be properly certified without raising any of the jurisdictional questions. Indeed, such class actions, in which creditors have filed class proofs of claim or class actions against the debtor’s estate, will plainly affect the administration of the debtor’s estate and the property available for distribution to the creditors. See Certified Class in the Charter Securities Litigation v. Charter Co. (In re The Charter Co.), 876 F.2d 866 (11th Cir. 1989) (class proof of claim filed by creditors); In re American Reserve Corp., 840 F.2d 487 (7th Cir. 1988) (class proof of claim filed by creditors); Stoner v. LTV Corp. (In re Chateaugay Corp.), 140 B.R. 64 (S.D.N.Y. 1992), vacated on other grounds, 153 B.R. 409 (S.D.N.Y. 1993) (class of non-union retirees alleging violation of ERISA filed against debtors’ estate); Lambert Group, Inc. v. Drexel Burnham Lambert, Inc. (In re The Drexel Burnham Lambert Group, Inc.), 130 B.R. 910 (S.D.N.Y. 1991), aff’d, 960 F.2d 285 (2d Cir. 1992) (class of claimants alleging securities fraud claims against debtor’s estate).

[22] 237 B.R. 687.

[23] Knox, 237 B. R. at 693-94 (citation omitted); see also, Simmons v. Ford Motor Credit Co., (In re Simmons), 224 B.R. 879, 886 (Bankr. N.D. Ill. 1998) (same); Fisher v. Federal Nat’l Mortgage Ass’n¸151 B.R. 895, 897 (Bankr. N.D. Ill. 1993) (same).

[24] Id. at 694.

[25] 231 B.R. 662, 667-68 (Bankr. N.D. Ill. 1999).

[26] Id. at 668 .

[27] Williams, 244 B.R. at 866.

Wendell H. Adair Jr.
Partner
Stroock & Stroock & Lavan LLP
wadair@stroock.com

Adair can be reached at (212) 806-5870.

Kristopher M. Hansen
Associate
Stroock & Stroock & Lavan LLP

Hansen holds law and bachelor’s degrees from Fordham University, and can be reached at (212) 806-6056.

Kenneth Pasquale
Partner
Stroock & Stroock & Lavan LLP

 

Claude G. Szyfer
Associate
Stroock & Stroock & Lavan LLP


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