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

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On the Nature of Federal Bankruptcy Jurisdiction: a General Statutory and Constitutional Theory William & Mary Law Review Volume 41 (1999-2000) Issue 3 Article 2 March 2000 On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory Ralph Brubaker Follow this and additional works at: https://scholarship.law.wm.edu/wmlr Part of the Bankruptcy Law Commons Repository Citation Ralph Brubaker, On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory, 41 Wm. & Mary L. Rev. 743 (2000), https://scholarship.law.wm.edu/wmlr/ vol41/iss3/2 Copyright c 2000 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/wmlr William and Mary Law Review VOLUME 41 MARCH 2000 NUMBER 3 ON THE NATURE OF FEDERAL BANKRUPTCY JURISDICTION: A GENERAL STATUTORY AND CONSTITUTIONAL THEORY RALPH BRUBAKER* 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 m 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 pro- jects into the future. Justice Frankfurter in Romero v. InternationalTerminal Operating Co.t * Associate Professor of Law, Emory University School of Law. I am grateful for helpful critique of earlier drafts of this Article, provided by Peter Alces, Tom Arthur, Susan Block-Lieb, Bill Buzbee, Rich Freer, Margaret Howard, Judge Edith Jones, Bob Lawless, Rick Marcus, John McCoid, Tom Plank, Polly Price, Charles Tabb, and Robert Schapiro; for the excellent research assistance of Susannah Baker, Jeff Bjork, Mark Hebbeln, and Melissa Hoffman; and for generous financial support from Emory Law School. t358 U.S. 354, 360 (1959). 744 WILLIAM AND MARY LAW REVIEW [Vol. 41:743 TABLE OF CONTENTS INTRODUCTION ................................. 746 I. THE EVOLUTION OF FEDERAL BANKRUPTCY JURISDICTION. 755 A. Early American Bankruptcy Statutes: The Birth of a General Federal Bankruptcy Jurisdiction ............................. 757 1. The Bankruptcy Act of 1800 ............... 758 2. The Bankruptcy Act of 1841 ............... 759 3. The Bankruptcy Act of 1867 ............... 763 B. The Bankruptcy Act of 1898: A Federalism-InspiredRetrenchment Forces Re- affirmation of the Nature of FederalBankruptcy Proceedings and Spawns Supplemental Bank- ruptcy Jurisdiction ....................... 765 1. General Federal Jurisdictionover Claims by and Against the Bankruptcy Estate ....... 767 a. Section 23's Restrictions and Misleading Distinction ............... 768 b. The "Bankruptcy Proceedings" in a CorporateReorganization ......... 774 2. Supplemental Bankruptcy Jurisdiction ...... 777 a. The Impostor in Section 2a(20) ......... 778 b. "Necessity" Jurisdiction over Third-PartyDisputes ................ 780 c. Ancillary Jurisdiction of the Estate's Counterclaims ............... 784 d. The Estate's Avoidance Actions and Pendent State-Law Claims ......... 788 C. The Bankruptcy Reform Act of 1978: Pervasive Federal Jurisdiction Renews an Unexpected Constitutional Quandary .......... 790 II. A CONSTITUTIONAL THEORY OF FEDERAL BANKRUPTCY JURISDICTION .................................. 800 A. An Article I Approach: The Bankruptcy Power as a FederalForum Power 807 B. Constitutional Federal Questions and a Federal Entity Theory ............................ 813 20001 A THEORY OF FEDERAL BANKRUPTCY JURISDICTION 745 1. Trustee as Representative of the Bankruptcy Estate ................................ 816 2. Debtor-in-Possessionas Representative of the Bankruptcy Estate .................... 822 C. ConstitutionalSupplemental Jurisdiction ......... 831 1. The EquitableReceivership Paradigm ........ 832 2. Clarifying the Jurisdictional Unit in a Bankruptcy "Case"........................ 835 3. Shifting from an In Rem to an In Perso- nam Model of Bankruptcy Jurisdiction ....... 844 IH. A STATUTORY THEORY OF FEDERAL BANKRUPTCY JURISDICTION .................................. 852 A. Deconstructingthe Bankruptcy JurisdictionStatute . 854 1. Marathon's Transmogrificationof "Related to" Jurisdiction ......................... 856 2. ReconstructingBankruptcy's Jurisdictional Nexuses ............................... 859 a. "ArisingUnder" and "Arisingin" Proceedings: Constitutional Federal Questions .................... 859 b. "Related to" Proceedings: Sup- plemental Jurisdiction over Third-PartyDisputes ................. 862 B. Pacor's Mutilation of Third-Party "Related to" Ju- risdiction ............................... ... 869 1. The "Conceivable Effect" Test and Unlim- ited Bankruptcy Jurisdiction ............ ... 871 2. Frenville Strikes Again ................ ... 875 3. An Unwarranted Repudiation of Supple- mental Jurisdiction ................... ... 878 4. Disregardof First Principlesand the Role of Abstention ........................ ... 881 5. The Inartful In Rem Nature of the Pacor Test ............................... ... 887 a. One Step Backward: No Juris- diction Incident to Possession ........ ... 892 b. Two Steps Backward: No Juris- diction Incident to Distribution ....... ... 896 746 WILLIAM AND MARY LAW REVIEW [Vol. 41:743 C. Inching Toward In Personam Third-Party "Related to" Jurisdiction ............................. 903 1. Joint Conduct and Intertwined Parties ....... 905 2. Claims by and Against an Individual Debtor ... 910 D. Erasing the Line Between "Related to" and "Supple- mental" Bankruptcy Jurisdiction ................ 921 1. The Irrelevance of the Supplemental Juris- diction Statute .......................... 926 2. Braving the Chill of Indeterminate Con- stitutional Theory ....................... 933 CONCLUSION ................................... 941 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.' 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."' 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 1. See THE BANKRUPTCY YEARBOOK & ALMANAC 8-10 (Christopher M. McHugh ed., 9th ed. 1999); Elizabeth Warren & Jay L. Westbrook, The Business Bankruptcy Pro- ject: The Work in Progress, 1998 NATL CoNF. BANKR. JUDGES 2-3, at 2-22 to 2-24; 33 Bankr. Ct. Dec. Wkly. News & Comment (LRP) No. 23, at A10 to All (Mar. 16, 1999). 2. See RICHARD H. FALLON, JR. ET AL., HART AND WECHSLER'S THE FEDERAL COURTS AND THE FEDERAL SYSTEM 441-44, 901-03 (4th ed. 1996). 3. U.S. CONST. art. I, § 8, c. 4. 4. See, e.g., John D. Ayer, Through Chapter 11 with Gun or Camera, but Probably Not Both: A Field Guide, 72 WASH U. L.Q. 883, 886 (1994) ("It is axiomatic that bankruptcy respects rights established under state law."); Vern Countryman, The Use of State Law in Bankruptcy Cases (pts. 1 & 2), 47 N.Y.U. L. REV. 407, 631 (1972). 20001 A THEORY OF FEDERAL BANKRUPTCY JURISDICTION 747 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 in- scrutable 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 depar- tures that would accommodate the apparent anomaly of federal bankruptcy jurisdiction.' These efforts, however, have not grap- pled with the parallel and equally bedeviling problem of charting 5. U.S. CoNsT. art. m, § 2, cl. 1. 6. Professor Wright, in responding to inquiries from the House Judiciary Commit- tee, frustratingly stated that "I do not know how many angels can stand on the head of a pin until the Supreme Court tells me." By way of explanation for this exaspera- tion, he made the following observations regarding the constitutional source of federal bankruptcy jurisdiction: Although we know from Williams v. Austrian -and Schumacher v. Beeler that "constitutional courts" can hear plenary actions in a bankruptcy case, we do not know why this is so. As astute a student of federal ju- risdiction as Felix Frankfurter tried to explain this in his opinion in the National Mutual case. He spoke to the matter again in Textile Workers Union v. Lincoln Mills. Yet the explanations he offers in those two opin- ions do not seem to me to be wholly consistent. Letter from Charles Alan Wright to Chairman Rodino
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