The subject matter jurisdiction of bankruptcy courts causes confusion and can be hard to understand.  In a recent decision, the United States Court of Appeals for the Eleventh Circuit clarified the meaning of the phrase “related to” in 28 U.S.C. §1334(b),  the federal statute that governs the subject matter jurisdiction of bankruptcy courts.[1]

A husband and a wife had settled a state law foreclosure action with their mortgage lender.  The couple had agreed to the entry of a consent foreclosure judgment.  But one day before the scheduled foreclosure sale, the wife filed for chapter 11.  The wife and the mortgage lender then reached another agreement to resolve their dispute regarding the real property.  That agreement was embodied in the wife’s plan that the bankruptcy court confirmed.  But the wife didn’t comply with those terms, and the property was sold post-confirmation through a foreclosure sale. 

Shortly after the sale, the husband brought a state court action against the mortgage lender and the buyer of the real property, asserting various contract and tort claims.  The defendants removed the action to the bankruptcy court, but that court dismissed the complaint.  The judge invoked its jurisdiction on the ground that the husband’s claims were inextricably intertwined with the wife’s bankruptcy proceeding.  The district court affirmed the dismissal, and the husband appealed to the Eleventh Circuit. 

A bankruptcy court exercises jurisdiction derivative of and dependent upon a district court’s jurisdiction.  28 U.S.C. §1334 prescribes the rule governing subject matter jurisdiction of district courts regarding bankruptcy related matters.  §1334(b) provides three categories of claims that fall within subject matter jurisdiction of district courts: 1) civil proceedings “arising under title 11,” more commonly known as the “Bankruptcy Code,”  2) civil proceedings “arising in . . . cases under title 11,” and 3) civil proceedings “related to cases under title 11.”  28 U.S.C. §157(a) allows a district court to refer those matters to a bankruptcy court in the same district.  In the Kachkar case, the Eleventh Circuit held that the husband’s complaint was “related to” the wife’s bankruptcy case and therefore was within subject matter jurisdiction of the bankruptcy court. 

Under the Eleventh Circuit law, a civil proceeding, at minimum, must have some nexus with a bankruptcy case to be “related to” the case.  Typically, the nexus inquiry would ask whether the potential outcome of the civil proceeding would “conceivably have an effect” on the estate in the bankruptcy case.[2] Acknowledging that it has not addressed the scope of “related to” jurisdiction in the post-confirmation context in a published opinion yet, the Eleventh Circuit decided this case by citing a Third Circuit decision, which held that “matters that affect the interpretation, consummation, execution, or administration of the confirmed plan will typically have the requisite close nexus.”[3] The husband’s complaint alleged violations of several bankruptcy court orders entered in the wife’s bankruptcy case, including the plan confirmation order.  The Eleventh Circuit opined that a favorable outcome for such allegations would at least conceivably call into question the resolution of certain matters in the wife’s bankruptcy case, and such relationship constituted a nexus sufficient to establish the “related to” jurisdiction.  Therefore, the husband’s complaint fell within subject matter jurisdiction of the bankruptcy court.

[3]  J. Louis Binder v. Price Waterhouse & Co., LLP, 372 F.3d 154, 167 (3d Cir. 2004).