In the recent decision of In re Pegasus Gold Corp., 394 F.3d 1189 (9th Cir. 2005), the Ninth Circuit Court of Appeals became the first circuit court to unequivocally hold that bankruptcy courts can exercise supplemental jurisdiction pursuant to 28 U.S.C. §1367 over "non-core," un-"related to" claims. The Ninth Circuit's decision in Pegasus stretches the bankruptcy courts' jurisdiction to seemingly limitless bounds and, as one court has prophesized, may result in running another Marathon.¹

The Well-known Limits

As every bankruptcy practitioner knows, as Article I courts, bankruptcy courts are courts of limited jurisdiction, with their reach defined by statute. In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858 (1982), the Supreme Court held that it was unconstitutional to vest full and final authority over any matter conceivably related to a bankruptcy case in an Article I judge because, under the Constitution, the "judicial power" of the United States, if vested in lower federal courts at all, must be vested in courts with Article III safeguards. In so holding, the Supreme Court acknowledged that Congress may provide the bankruptcy courts with authority over proceedings that are so closely related to substantive bankruptcy law and procedures that they can be said to be "core" bankruptcy matters. However, the Supreme Court also ruled that Congress may not give Article I judges the power to render final judgments over matters that are not directly connected to the Bankruptcy Code.

In response to the Supreme Court's directive in Marathon, Congress enacted 28 U.S.C. §§157 and 1334. Section 1334(a) confers upon the district courts "original and exclusive jurisdiction of all cases under Title 11." Section 1334(b) adds 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." Section 157(a) in turn provides that the district courts may refer their bankruptcy jurisdiction to bankruptcy courts.

Generally speaking (assuming an order of reference has been entered by the district court), bankruptcy court jurisdiction is bifurcated into "core" and "related to" matters. Core proceedings are those that are "predicated on a right created by a provision in Title 11."² Stated otherwise, core proceedings are those proceedings that involve a cause of action or administrative matter created or determined by a statutory provision of Title 11.³ Core proceedings have no existence outside a bankruptcy case. In each case, a bankruptcy court has the authority to hear and determine a "core" claim without the necessity of any involvement by the district court.

In addition to "core" claims, a bankruptcy judge may hear a proceeding deemed to be a "non-core" proceeding under 28 U.S.C. §157 if the claim is otherwise "related to" a case under Title 11. However, absent the parties' consent, the bankruptcy judge may not enter a final judgment on such non-core, related-to claims, but rather must submit proposed findings of fact and conclusions of law to the district judge, who then must review such findings and conclusions de novo.⁴

The most common definition of a "related to" proceeding is one where "the outcome of the action could conceivably have any effect on the estate being administered in bankruptcy."⁵ Stated another way, "an action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate."⁶ An example of a "related to" matter would be a common state law claim that a debtor has against a third party, such as a lawsuit against a director of a debtor corporation for breach of fiduciary duties.

Under 28 U.S.C §§157 and 1334, if a matter is neither a core proceeding nor a related-to proceeding, then a bankruptcy court does not have subject matter jurisdiction to consider the matter. After all, bankruptcy courts receive their entire jurisdictional manna from the district courts, and nowhere does §157(a) authorize the district courts to delegate more than core and related-to jurisdiction to the bankruptcy courts.

Stretching the Limits

But of course, the story does not end there. Some lower courts,⁷ and now the Ninth Circuit Court of Appeals, have employed the supplemental jurisdiction statute of 28 U.S.C. §1367 to stretch the limited jurisdiction of the bankruptcy courts to seemingly infinite bounds. 28 U.S.C. §1367(a) provides as follows:

Except as provided in subsections (b) and (c) or as expressly provided otherwise by federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the U.S. Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.

In a nutshell, §1367 allows a federal district court to consider claims that it would otherwise not have jurisdiction over so long as those claims arise out of the same nucleus of operative fact as a claim over which the district court does have original subject-matter jurisdiction. As stated by one court, the jurisdictional grant under §1367 is an extremely broad grant of authority that extends the jurisdiction of the district court to the very limits of Article III of the Constitution.⁸

In In re Pegasus Gold Corp., 394 F.3d 1189 (9th Cir. 2005), the Ninth Circuit Court of Appeals became the first circuit court to unequivocally extend the jurisdictional reach of 28 U.S.C. §1367 beyond the district courts and allowed supplemental jurisdiction to be exercised by the bankruptcy court. In Pegasus, a chapter 11 debtor owed certain environmental compliance and clean-up obligations to the state of Montana in connection with two mines operated by the debtor in that state. After extensive negotiations between the parties, they agreed that the debtor would form a new corporate entity that would perform reclamation work for the state at the subject mines. The settlement agreement further provided that the debtor would provide the new entity with $1 million in working capital and also transfer over $1 million to the state of Montana to help pay for the reclamation work. The terms of the settlement agreement were incorporated into the debtor's confirmed chapter 11 plan. The parties executed a formal work agreement, and the new entity began the reclamation process. The parties' working relationship quickly soured however, and within two months the state of Montana hired another unrelated entity to perform the reclamation work. The liquidating trustee then brought an adversary proceeding against the state of Montana alleging a number of contract claims stemming from the state's alleged breach of the settlement agreement and the debtor's chapter 11 plan. As part of that adversary proceeding, the trustee also joined as a party defendant the new entity that the state had hired to complete the reclamation work, asserting claims for tortuous interference and conversion against it. The new entity moved to dismiss these claims, arguing that the bankruptcy court lacked subject matter jurisdiction over the claims against it. The bankruptcy court determined that it had supplemental jurisdiction to consider the claims against the new entity. Both the district court and the Ninth Circuit affirmed that decision on appeal.

By authorizing the utilization of supplemental jurisdiction in bankruptcy courts in Pegasus, the Ninth Circuit has, in effect, disregarded the limiting referral language of 28 U.S.C. §157(a) and has authorized bankruptcy courts to exercise jurisdiction over claims that have no conceivable relation to the bankruptcy case or the administration of the bankruptcy estate. In essence, bankruptcy courts (at least those in the Ninth Circuit) can now exercise jurisdiction over claims that are related to related-to or core matters.⁹

Although the exercise of supplemental jurisdiction by bankruptcy courts undoubtedly serves judicial economy by bringing all related claims to a comprehensive and consistent conclusion, efficiency and uniformity alone ought not supersede specific statutory limits on bankruptcy court jurisdiction.¹⁰ The Ninth Circuit's holding in Pegasus not only supplants the careful congressional construct of 28 U.S.C. §157, limiting bankruptcy jurisdiction to core and related-to matters, but also cuts against the Supreme Court's directive that courts not "read jurisdictional statutes broadly."¹¹

Conclusion

To date, the only circuit appeals court other than the Ninth Circuit that has considered the question of whether bankruptcy courts are authorized to exercise supplemental jurisdiction under 28 U.S.C. §1367 is the Fifth Circuit. In In re Walker, 51 F.3d 562, 573 (5th Cir. 1995), the Fifth Circuit reached a decision contrary to that in Pegasus, concluding that bankruptcy courts cannot exercise supplemental jurisdiction to hear non-core unrelated-to claims.¹² Due to the split in the circuits, perhaps the Supreme Court will someday step into the fray and, as cleverly articulated by the bankruptcy court in Remington Development, "run another Marathon."¹³ In the meantime, the watchword of Buzz Lightyear of Disney/Pixar (Toy Story) fame aptly summarizes the jurisdictional reach of the bankruptcy courts in the Ninth Circuit: "to infinity and beyond."

---

Footnotes

¹ In re Remington Development Group Inc., 180 B.R. 365, 373 (Bankr. D. R.I. 1995). Return to article

² Drexel Burnham Lambert Group Inc. v. Vigilant Insurance Co., 130 B.R. 405, 407 (S.D.N.Y. 1991). Return to article

³ 28 U.S.C. §157(b)(2) lists a litany of matters that are core proceedings. Return to article

⁴ 28 U.S.C. §157(c)(1). Return to article

⁵ In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988). Return to article

⁶ In re Pegasus Gold Corp., 296 B.R. 227, 234 (Bankr. D. Nev. 2003). Return to article

⁷ See, e.g., In re Eads, 135 B.R. 387 (Bankr. E.D. Cal. 1991); In re W.J. Servs. Inc., 139 B.R. 824, 826 (Bankr. D. Tex. 1992). Return to article

⁸ Sullivan v. Metro-North Railroad Co., 179 F.Supp.2d 2, 5 (D. Conn. 2002). Return to article

⁹ In addition to authorizing supplemental jurisdiction over state law claims, the Pegasus court also determined that pursuant to 28 U.S.C. §1367, a bankruptcy court is authorized to exercise supplemental jurisdiction over parties even when that party is not subject to the federal claim primarily at issue. Pegasus, 394 F.3d at 1195 n.2. The Pegasus court's holding in this regard deepens the jurisdictional quagmire even more because it exposes litigants to the nationwide reach of the bankruptcy courts as far as personal jurisdiction is concerned, even though the litigant may have had no connection or contact whatsoever with the debtor or the state where the debtor's bankruptcy is pending. Return to article

¹⁰ Accord, In re Remington Development Group Inc., 180 B.R. 365, 374-75 (Bankr. D. R.I. 1995). It is worth noting that a different analysis may apply and that the exercise of supplemental jurisdiction may be appropriate when a district court (as opposed to a bankruptcy court) is presiding over a particular bankruptcy case or matter. Accord, Allen v. Kuhlman Corp., __ B.R. __, 2005 WL 701063 (S.D. Miss. 2005); Liberty Mut. Ins. Co. v. Lone Star Industries Inc., 313 B.R. 9, 21 (D. Conn. 2004). Return to article

¹¹ Finley v. United States, 490 U.S. 545, 549, 109 S.Ct. 2003, 2007 (1989). Return to article

¹² See, also, In re Bass, 171 F.3d 1016, 1024 (5th Cir. 1999). Return to article

¹³ See n. 1, supra. Return to article