History of the Federal Judiciary


History of the Federal Judiciary


  Bankruptcy Jurisdiction in the Federal Courts
For much of their history, federal courts have exercised jurisdiction over cases arising under federal bankruptcy laws. This jurisdiction is derived not from Article III of the Constitution, but from Congress’s authority under Article I to establish “uniform laws on the subject of bankruptcies throughout the United States.” Under federal bankruptcy laws, the district courts have been responsible for gathering the assets of an insolvent debtor and distributing them to creditors in an equitable manner. Bankruptcy proceedings frequently give rise to other lawsuits between those appointed by the court to manage the bankrupt estate and third parties with claims on assets alleged to be due to the estate—suits that typically turn on issues of state law. Legislation and court decisions defining federal bankruptcy jurisdiction have often reflected an effort to reconcile the authority of state and federal courts.

Congress passed the nation’s first bankruptcy law in 1800 after a decade of periodic financial crises and commercial failures. The Bankruptcy Act of 1800 was modeled on English practice, in which bankruptcy proceedings were established only for merchants, bankers, and brokers and only on the petition of a creditor. District judges appointed commissioners to administer each case, and the bankrupt estate was placed under the control of an assignee chosen by creditors. Set to expire in 1805, the law proved unpopular, and Congress repealed it in 1803.

The Bankruptcy Act of 1841, passed in response to the Panic of 1837, for the first time allowed insolvent debtors, both merchants and non-merchants, to voluntarily commence bankruptcy proceedings. Under the 1841 Act, the district courts had jurisdiction over “all cases and controversies in bankruptcy arising between the bankrupt and any creditor” and “to all acts, matters, and things to be done under and in virtue of the bankruptcy.” In his 1845 Supreme Court opinion in the case of Ex Parte Christy, Justice Joseph Story held that suits by a bankruptcy assignee to recover debts owed to the estate were part of the proceedings that could be handled by a district court acting as a court of bankruptcy. Story reasoned that Congress possessed authority to provide for the efficient and uniform administration of the bankruptcy laws through national tribunals without resort to state courts over which it could exercise no control. The 1841 Act led to over 33,000 bankruptcy filings in the short time it was in operation and swelled district court dockets. The law was highly sympathetic to debtors and increased their opportunities to discharge debts, leading to much criticism of the law and ultimately its repeal.

Congress in 1867 passed a new bankruptcy statute that granted the district and circuit courts expansive jurisdiction over ordinary suits in law and equity related to a bankrupt estate. The 1867 Act included “the collection of all the assets of the bankrupt” as part of its grant of jurisdiction over “proceedings in bankruptcy.” The Supreme Court in the 1875 case of Lathrop v. Drake ruled that assignees could commence proceedings to collect debts owed the estate in any district court in the country where assets were held, not just in the district court where the bankruptcy was commenced. Congress also granted the district courts and the circuit court within the district where the bankruptcy was commenced concurrent jurisdiction over suits between bankruptcy assignees and third parties involving so-called adverse claims, or disputes over property alleged to be due to the bankrupt estate. These “plenary suits,” as distinct from the “summary jurisdiction” over assets already deemed to be part of the estate, could be brought in a federal court even if no other basis for federal court jurisdiction existed. An 1874 amendment allowed a plenary suit involving a bankrupt estate in any circuit court, not just in the district where the bankruptcy was filed. The Supreme Court upheld these grants of jurisdiction as a legitimate part of a national system of bankruptcy.

The 1867 act was the first statute to include provisions for corporate bankruptcies, though the largest corporate businesses of the time, the railroads, did not rely on the bankruptcy laws, instead turning to the federal courts sitting in equity to direct financial reorganization. The 1867 Act was repealed in 1874.

After the financial crisis of the 1890s, Congress in 1898 adopted a new bankruptcy law that provided for more narrow federal court jurisdiction than under previous bankruptcy acts. The district courts were designated as “courts of bankruptcy” with jurisdiction to hear summary bankruptcy proceedings, which were handled by a bankruptcy referee appointed by the court. The statute allowed a bankruptcy trustee (formerly known as the assignee) to bring plenary suits involving adverse claims to property only if the bankrupt and the other party could have entered federal court if bankruptcy had not been filed, or if the defendant consented.

Under the Bankruptcy Act of 1898, ordinary controversies related to bankrupt estates would be heard primarily in the state courts. Court-appointed trustees were required to file multiple suits in different courts in connection with a single bankruptcy and await their adjudication before being able to finalize the liquidation of an estate or reorganization of a corporation. In addition, the new act created a great deal of confusion as to which actions were to be considered summary proceedings and which were plenary suits, leading to frequent litigation to determine jurisdictional questions.

Congress passed a number of amendments in the early twentieth century expanding the summary bankruptcy jurisdiction of the district courts. In 1938, Congress passed the Chandler Act, which established bankruptcy court jurisdiction over large corporate reorganizations. In 1945, in the case of Williams v. Austrian, the Supreme Court ruled that the limits on district court jurisdiction over plenary suits embodied in the 1898 Act did not apply to corporate bankruptcies governed by the Chandler Act, opening up the federal courts to suits that would have been relegated to state courts.

Rising numbers of bankruptcy filings in the 1960s and 1970s led to a major reform of the federal bankruptcy system in 1978. The 1978 Bankruptcy Act, known popularly as the Bankruptcy Code, created new bankruptcy courts with expanded jurisdiction to hear all cases “arising under” and “related” to the bankruptcy proceedings. The goal of the new system was to create a single tribunal for legal disputes related to bankruptcies and to end the confusion about the distribution of responsibilities between bankruptcy referees, district courts, and state courts. The new bankruptcy judges under the act would be appointed by the president to terms of 14 years. The new bankruptcy courts had all of the powers of courts of law, equity, and admiralty, with the ability to hold jury trials. The bankruptcy courts could enforce their own orders, which could be appealed first to a panel of bankruptcy judges and subsequently to a U.S. court of appeals.

In 1982, the Supreme Court, in the case of Northern Pipeline Construction Co. v. Marathon Pipeline Co., ruled that it was unconstitutional for the bankruptcy courts to exercise the broad jurisdiction granted in the 1978 Bankruptcy Act. A majority of the Court ruled that jurisdiction over state common law issues only marginally related to a bankruptcy could not be conferred on judges lacking the tenure and salary protections of Article III.

Congress responded to the Northern Pipeline decision in 1984 with the Bankruptcy Amendments and Federal Judgeship Act, which established the bankruptcy courts as a “unit” of the district courts. The new statute granted the district courts “original and exclusive jurisdiction of all cases arising under” the bankruptcy laws, as well as original but not exclusive jurisdiction of “all civil proceedings arising under” or “arising in or related to cases under” the bankruptcy laws, all of which could be referred to the bankruptcy judges. The 1984 amendments established a distinction between the “core” and “noncore” bankruptcy proceedings that were similar to the “summary” and “plenary” distinction that existed under the 1898 law. The bankruptcy courts could “hear and determine” core matters, or those involving the bankrupt’s property or assets within the jurisdiction of the bankruptcy statute. In noncore matters that had another basis of federal jurisdiction, such as diversity of citizenship, the bankruptcy court could submit proposed findings of fact and conclusions of law to be reviewed a second time by the district court.

The question of federal jurisdiction over cases related to a bankruptcy has become increasingly complex since the reorganization of the bankruptcy courts. Congressional statutes and court decisions gradually expanded bankruptcy court jurisdiction over a range of actions deemed to be “related” to bankruptcy proceedings. In 2011, however, the Supreme Court ruled in Stern v. Marshall that it was unconstitutional for Congress to grant bankruptcy courts jurisdiction over certain state law counterclaims as part of their “core” proceedings because bankruptcy judges lacked Article III protections.

Further Reading:
Edward J. Balleisen, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America (Chapel Hill: University of North Carolina Press, 2001).

Ralph Brubaker, “On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory,” William and Mary Law Review 41, no. 3 (2000): 743.

Vern Countryman, “Scrambling to Define Bankruptcy Jurisdiction,” Harvard Journal on Legislation 22, no. 1 (1985): 1–45.

Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence (Cambridge: Harvard University Press, 2002).

William E. Mussman and Stefan A. Riesenfeld, “Jurisdiction in Bankruptcy,” Law and Contemporary Problems 13 (1948): 88–113.

David A. Skeel, Jr., Debt’s Dominion: A History of Bankruptcy Law in America (Princeton: Princeton University Press, 2001).

Charles Warren, Bankruptcy in United States History (Cambridge: Harvard University Press, 1935).

 

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