The Delaware Bankruptcy Court Explores the Limits of Bankruptcy Jurisdiction and Holds that It Cannot Exercise Supplemental Jurisdiction

Contributed by Edward Wu
In a recent decision from the case of In re: Semcrude, L.P., the Bankruptcy Court for the District of Delaware explored the outer-limits of a bankruptcy court’s jurisdiction under 28 U.S.C. §§ 157 and 1334 and held, as matter of first impression, that a bankruptcy court cannot utilize supplemental jurisdiction under 28 U.S.C. § 1367 as a jurisdictional basis to adjudicate a proceeding.
As explained by Judge Shannon in the Semcrude decision, the power of a bankruptcy court to consider a proceeding is essentially derived from the grant of jurisdiction to the district court pursuant to section 1334 and the procedures set out in section 157.  As such, district courts must themselves have jurisdiction in the first instance, which, pursuant to section 1334, extends to all proceedings (i) arising under the Bankruptcy Code (i.e., where a claim or action is created by the Bankruptcy Code), (ii) arising in a case under the Bankruptcy Code (i.e., a proceeding that could only arise in the context of a bankruptcy case), or (iii) related to a case under the Bankruptcy Code (i.e., proceedings that may conceivably impact the bankruptcy estate).  In turn, bankruptcy courts have jurisdiction to consider any of these three types of proceedings that are referred to them by district courts under section 157.  The first two types of proceedings (“arising under” and “arising in” matters) are called “core proceedings,” which bankruptcy judges may hear and decide by entering final orders and judgments.  The third type (“related to” matters) are “non-core” proceedings, which bankruptcy judges may hear but only propose findings of facts and conclusions of law to a district court, unless the parties all consent to the bankruptcy court’s jurisdiction to enter final judgment.
In Semcrude, certain producers of oil, who sold oil to the debtors but were never paid, brought state law claims in various non-bankruptcy courts against certain down-stream purchasers who obtained the producers’ oil from the debtors.  After the down-stream purchasers were able to transfer the cases to the Delaware bankruptcy court, the producers sought remand, arguing that the bankruptcy court lacked jurisdiction to hear their claims.  Because the producers’ claims were neither created by the Bankruptcy Code nor, by their nature, capable of arising only in a bankruptcy case, Judge Shannon considered whether the proceedings at issue could fall under the “related to” prong of section 1334.  While noting that the debtors’ estates could conceivably be impacted by the producers’ claims because they might cause the down-stream purchasers to assert contribution claims against the debtors, Judge Shannon cited Third Circuit precedent for the proposition that a proceeding comes within the “related to” prong only if it does not require the intervention of an additional lawsuit to affect the debtors.  Judge Shannon therefore found “related to” jurisdiction was lacking with respect to the down-stream purchasers who had not filed a proof of claim against the debtors, and found “related to” jurisdiction present with respect to the down-stream purchasers who had filed a proof of claim asserting a contingent right of contribution.
In addition to arguing that the bankruptcy court had jurisdiction pursuant to section 1334, several of the down-stream purchasers also argued that the court had jurisdiction to consider the producers’ claims under section 1367, the “supplemental” jurisdiction statute.  Section 1367 was enacted on the recognition that, while certain state law claims may not otherwise be heard by district courts (which, as federal courts, are of limited jurisdiction), upon certain criteria, such claims may be heard due to considerations of judicial efficiency when the district court has original jurisdiction with respect to other claims that share the same common nucleus of operative facts.
In Semcrude, Judge Shannon noted that while the Ninth Circuit has held that a bankruptcy court may exercise supplemental jurisdiction, both the Court of Appeals for the Fifth Circuit and the Bankruptcy Court for the Southern District of New York had concluded that bankruptcy courts cannot exercise supplemental jurisdiction.  The latter two courts reasoned that the statutory language of section 1367 does not authorize bankruptcy courts to exercise supplemental jurisdiction and that the carefully-crafted conferral of jurisdiction under section 1334 or 157 does not allow for consideration of a supplemental non-federal claim which has no impact on a bankruptcy estate.  Judge Shannon stated that he was persuaded by such reasoning, and ruled that section 1367 could not serve as a jurisdictional basis for the court to consider the producers’ claims.
It can be argued that Semcrude was rightly decided based on certain statutory and policy considerations.  A determination of whether a federal court has jurisdiction to consider a matter is typically a two-step analysis bearing on, first, whether there is a basis for jurisdiction under the U.S. Constitution, and secondly, whether such constitutional basis for jurisdiction has been limited by statute enacted by Congress.  It would appear that by negative implication, section 1334 statutorily grants a bankruptcy court the power to consider only proceedings that at least “relate to” a case under the Bankruptcy Code.  Moreover, from a policy perspective, if bankruptcy courts are to expeditiously resolve cases for the benefit of all parties in interest, it is questionable whether a bankruptcy court should even consider proceedings which fail to come within the generous standard of being “related to” a case under the Bankruptcy Code.  Nevertheless, exceptional situations may arise where considerations of judicial economy are so strong that bankruptcy judges should have the option to consider whether to exercise supplemental jurisdiction.  If Congress feels so compelled, it could enact a presumption against the exercise of supplemental jurisdiction by bankruptcy courts, which, upon sufficient showing and due consideration for the current workload of a bankruptcy court, would allow bankruptcy judges to exercise supplemental jurisdiction.  Even then, however, a bankruptcy judge would only be able to propose findings of facts and conclusions of law to the district court, unless all parties consented to the bankruptcy court’s authority to enter final judgments.

Disclosure: Weil, Gotshal and Manges LLP represents the debtors in the bankruptcy cases of In re Semcrude, L.P.