- Primary Jurisdiction
- Exhaustion of Administrative Remedies
- Removal and Remand
- Personal Injury and Wrongful Death Claims
- Jury Trials
- "Court of the United States
- Article III Judicial Power
- Scope of the Court's Authority Under Selected Bankruptcy Code Sections
- Res Judicata and Collateral Estoppel
Bankruptcy jurisdiction, though broad, is subject to such limiting principles as justiciability and standing, which govern Federal courts generally. The following topics address various other rules and principles (besides sovereign immunity, which is treated later in this outline), which limit the exercise of bankruptcy jurisdiction under certain conditions.
1. Abstention. "Abstention" is a judicially created doctrine to resolve conflicts between Federal and state court and is based on comity with state courts. See 17A Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure: Jurisdiction 2d §§ 4241-55 (2d ed. 1988). However, abstention in the context of bankruptcy cases is statutory, see 28 U.S.C. § 1334(c), and has been extended to administrative and Federal forums. See Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.), 935 F.2d 1071 (9th Cir. 1991) (district court did not abuse its discretion by abstaining to local administrative proceedings to resolve issues in adversary proceeding); In re T.D.M.A. Inc., 66 B.R. 992, 995 (Bankr. E.D. Pa. 1986) ("the statement that '[n]othing . . . prevents a district court in the interests of justice' from abstaining . . . probably applies to reference to federal as well as state forums").
a. Mandatory Abstention.
A bankruptcy court must abstain where:
(1) timely motion is made by a party;
(2) proceeding is based on a state law claim or cause of action;
(3) proceeding is "related to" a case, not "arising under" the Code or "arising in" a case; In re Chicago, Milwaukee, St. Paul & Pac. R.R., 6 F.3d 1184, 1194 (7th Cir. 1993); In re Emerald Acquisition Corp., 170 B.R. 632, 646 (Bankr. N.D. Ind. 1994) (non-core proceeding requirement is most important factor);
(4) but for the bankruptcy, proceeding would have been brought in state, not Federal, court (i.e., no independent ground of Federal jurisdiction); and
(5) action is commenced which the bankruptcy court finds will be timely adjudicated. 28 U.S.C. § 1334(c)(2). See Miller & Miller Auctioneers, Inc. v. Ritchie Bros. Auctioneers Int'l (In re Mo. Props. Inc.), 211 B.R. 914 (Bankr. W.D. Mo. 1996). Non-core proceedings involving the liquidation or estimation of personal injury tort and wrongful death claims against the estate are not subject to mandatory abstention. 28 U.S.C. § 157(b)(4).
b. Permissive Abstention.
(1) Bankruptcy courts may abstain from hearing a proceeding arising under the Code or arising in or related to a case under the Code if such abstention is in the interest of justice, comity with state courts, or respect for state law. 28 U.S.C. § 1334(c)(1). The court may abstain from the entire bankruptcy case in some circumstances. 11 U.S.C. § 305.
(2) Permissive abstention is not limited to state law claims. Bankruptcy courts have abstained to permit other Federal courts and administrative boards to resolve disputes, inter alia, government contract issues. See, e.g., Asbestosis Claimants v. Apex Oil Co. (In re Apex Oil Co.), 980 F.2d 1150 (8th Cir. 1992) (court abstained in favor of a Federal district court multi-district action involving Jones Act and maritime claims); Plum Run Serv. Corp. v. United States Dep't of the Navy (In re Plum Run Serv. Corp.), 167 B.R. 460, 464-65 (Bankr. S.D. Ohio 1994) (abstention in favor of Armed Services Board of Contract Appeals); United States v. Am. Pouch Foods, Inc. (In re Am. Pouch Foods, Inc.), 30 B.R. 1015, 1023-24 (N.D. Ill. 1983) (same), aff'd, 769 F.2d 1190 (7th Cir. 1985); see also Franklin Sav. Corp. v. Office of Thrift Supervision, 213 B.R. 596 (D. Kan. 1997) (deferring consideration of Fifth Amendment "taking" claim to Court of Federal Claims); In re Kalvar Microfilm, Inc., 208 B.R. 819 (Bankr. D. Del. 1997) (abstaining from hearing tariff drawback dispute in favor of Customs Service). Abstention requires the consideration, inter alia, of (1) the effect on the efficient administration of the estate; (2) the extent to which Federal law issues predominate over bankruptcy issues; (3) the difficulty of the applicable Federal law issues; (4) the presence or availability of related proceedings in nonbankruptcy fora; (5) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; and (6) the feasibility of severing the Federal law claims from core bankruptcy matters. Plum Run Serv. Corp., 167 B.R. at 465; see also Hutchins v. Fordyce Bank & Trust Co. (In re Hutchins), 211 B.R. 319 (Bankr. E.D. Ark. 1997); Fid. Nat'l Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913, 928 (Bankr. E.D. Cal. 1995) (12 factors to consider in deciding whether to abstain).
(3) See also Apex Oil Co. v. United States Customs Serv. (In re Apex Oil Co.), 122 B.R. 559 (Bankr. E.D. Mo. 1990), rev'd, 131 B.R. 712 (E.D. Mo. 1991) (bankruptcy court's abstaining in favor of CIT was not in the interest of justice). But see In re Kalvar Microfilm, Inc., 208 B.R. 819, 824 (Bankr. D. Del. 1997) (Apex decision merely highlights fact-intensive nature of inquiry, supports abstention in favor of CIT in this case). Abstention decision is made by the bankruptcy court. Fed. R. Bankr. P. 5011(b). Review Of Abstention Decisions. Orders refusing to abstain in state law legal proceedings may be appealed. 28 U.S.C. § 1334(d). However, other abstention decisions are otherwise reviewable only by the district court and not by the courts of appeals or the Supreme Court. See Chemical Bank v. Togut (In re Axona Int'l Credit & Commerce Ltd. (Formerly Bancom Int'l Ltd.)), 924 F.2d 31 (2d Cir. 1991) (§ 305(c) permits district court -- but not court of appeals or Supreme Court -- to review decision to dismiss or suspend a case under § 305(a), thereby avoiding Art. III constitutional difficulties). But see In re United States Brass Corp., 110 F.3d 1261 (7th Cir. 1997) (abstention order taking form of dismissal or remand rather than mere stay of district court proceedings is an appealable final decision).
a. Courts must defer to another forum when "enforcement of the claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body; in such a case the judicial process is suspended pending referral of such issues to the administrative body for its views." United States v. W. Pac. Ry. Co., 352 U.S. 59, 64 (1956); see also Miller v. WD-40 Co., 29 F. Supp. 2d 1040, 1045 (D. Minn. 1998) (primary jurisdiction requires referral of tariff dispute to Surface Transportation Board where interpretation of disputed term or phrase implicates larger issues of transportation policy demanding uniform administration by an expert body); Bousa, Inc. v. United States (In re Bulk Oil (USA), Inc.), 209 B.R. 29 (S.D.N.Y. 1997); In re Buckeye Countrymark, Inc., 227 B.R. 498 (Bankr. S.D. Ohio 1998).
b. Deferral in such circumstances has been expanded to include virtually any case whose consideration lies within a specialized agency. See, e.g., Oasis Petroleum Corp. v. United States Dep't of Energy, 718 F.2d 1558, 1563-64 (Temp. Emer. Ct. App. 1983); Nat'l Republican Cong. Comm. v. Legi-Tech Corp., 795 F.2d 190 (D.C. Cir. 1986) (deferral of a copyright matter to the Federal Election Commission); Niagara Mohawk Power Corp. v. Megan-Racine Assocs. (In re Megan-Racine Assocs.), 180 B.R. 375 (Bankr. N.D.N.Y. 1995) (defers resolution of issues involving interpretation of the Public Utility Regulatory Act to the Federal Energy Regulatory Commission).
c. Even in the bankruptcy context deferral of issues in such circumstances is not discretionary. See Reiter v. Cooper, 507 U.S. 258, 268 (1993) (doctrine of primary jurisdiction is "applicable to claims properly cognizable in court that contain some issue within the special competence of an administrative agency. It requires the court to enable a 'referral' to the agency [here the ICC], staying further proceedings so as to give the parties reasonable opportunity to seek an administrative ruling"); Board of Governors of Fed. Reserve Sys. v. MCorp Fin., Inc., 502 U.S. 32, 41-42 (1991) (where Congress has committed certain types of decisions to specialized tribunals, bankruptcy courts must defer); Nathanson v. NLRB, 344 U.S. 25, 30 (1952) (court must defer to NLRB over unfair labor practice claims); Order of Ry. Conductors of Am. v. Pitney, 326 U.S. 561, 564-65 (1946) (court must defer to Railway Labor Adjustment Board over extent of union authority); Smith v. Hoboken R.R., 328 U.S. 123, 126, 132 (1946) (court must defer to ICC over determination of right to leased tracks); Hargrave v. Freight Distrib. Serv., Inc., 53 F.3d 1019, 1021 (9th Cir. 1995) (bankruptcy court must refer issues to the ICC if they are properly under the "primary jurisdiction" of that agency); Delta Traffic Serv., Inc. v. Transtop, Inc., 902 F.2d 101, 103-04 (1st Cir. 1990) (Breyer, C.J.) (primary jurisdiction doctrine requires court to suspend its process and refer a matter to an administrative body whenever enforcement of a judicial claim requires resolution of issues which, under a regulatory scheme, have been placed within the special competence of that administrative body); Kellogg v. United States Dep't of Energy (In re Compton Corp.), 889 F.2d 1104, 1107 (Temp. Emer. Ct. App. 1989) (bankruptcy court "must defer" to specialized forum); United States v. Gen. Dynamics Corp., 828 F.2d 1356, 1364 n.15 (9th Cir. 1987) ("[A]n issue is either within an agency's primary jurisdiction or it is not, and, if it is, a court may not act until the agency has made the initial determination. Failure to defer when the doctrine so mandates is reversible error." Court holds that deferral not appropriate in government contracting issues because BCA/CFC are not "agencies" so doctrine does not apply; dissent argues persuasively to the contrary); Gary Aircraft Corp. v. United States (In re Gary Aircraft Corp.), 698 F.2d 775, 784 (5th Cir. 1983) (deferral of government contracting issues to CDA forums mandatory); Friedman's Express, Inc. v. SKF USA, Inc. (In re Friedman's Express, Inc.), 180 B.R. 788 (Bankr. E.D. Pa. 1995) (deferral to ICC); Allen v. G.H. Bass & Co., 176 B.R. 91, 100 (D. Me. 1994) (deferral to ICC); In re Am. Ship Bldg. Co., 164 B.R. 358, 362 (Bankr. M.D. Fla. 1994) ("in matters dealing with contract disputes [with the government], [a bankruptcy court] should yield to the jurisdiction of the Board of Contract Appeals unless the government seeks the bankruptcy court's jurisdiction or waives any right to object to [its] jurisdiction"); Misener Indus. v. United States (In re Misener Indus.), 54 B.R. 89 (Bankr. M.D. Fla. 1985) (deferral to Board of Contract Appeals or Court of Federal Claims is mandatory; the CDA "is the scheme, to the exclusion of all others, which Congress has enacted for the resolution of contract disputes involving government procurement contracts"). Contra Quality Tooling, Inc. v. United States, 47 F.3d 1569 (Fed. Cir. 1995) (bankruptcy courts need not defer to CDA forums for resolution of government contract issues; while resolution by CDA forums "is preferable," transfer is not required when "transfer of a relatively straightforward contract claim would cause substantial losses to the creditors . . . while resolution of the claim [by the bankruptcy court] would do no harm to the fabric of government contracting law"); Jones Truck Lines, Inc. v. Price Rubber Corp., 182 B.R. 901, 911 (M.D. Ala. 1995) (where issue falls within the particular expertise of a government agency, court may (1) retain jurisdiction; (2) stay the proceedings retaining jurisdiction and referring the matter to the administrative agency for a ruling; or (3) or dismiss the case without prejudice). Note: in Carrington Gardens Associates v. United States (In re Carrington Gardens Associates), 248 B.R. 752, 768-69 n.7 (Bankr. E.D. Va. 2000), aff'd, 258 B.R. 622 (E.D. Va. 2001), a case involving a debtor's action for contract damages against HUD, the court, noting the Supreme Court's intervening decision in Department of the Army v. Blue Fox, Inc., 525 U.S. 255 (1999), which reiterates that waivers of sovereign immunity must be both explicit and narrowly construed, expressly rejects the Federal Circuit's Quality Tooling decision.
3. Exhaustion of Administrative Remedies.
a. The doctrine of exhaustion of administrative remedies provides that a party is not entitled to judicial relief unless and until available administrative remedies have been exhausted. Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 50-51 (1938); accord Reiter v. Cooper, 507 U.S. 258 (1993); cf. Board of Governors of Fed. Reserve Sys. v. MCorp Fin., Inc., 502 U.S. 32 (1991) (§ 1334 concurrent jurisdiction with other courts is not an appropriate basis for staying administrative proceedings; specific preclusive language regarding administrative powers is not qualified or superseded by general bankruptcy provisions).
b. Where exhaustion of administrative remedies is judicially imposed, courts may waive the requirement under certain circumstances; however, those circumstances do not authorize waiver if the requirement is statutory. Bentley v. Glickman, 234 B.R. 12, 19 n.3 (N.D.N.Y. 1999); Scholl v. Neb. Student Loan Program (In re Scholl), 259 B.R. 345 (Bankr. N.D. Iowa 2001) (before a court may determine the existence of hardship, the Higher Education Act, 20 U.S.C. § 1087(c), and 34 C.F.R. § 685.215 require that the Secretary of Education make an initial determination in certain instances). But see Cottrell v. United States (In re Cottrell), 213 B.R. 33, 38 (M.D. Ala. 1997) (considering "defense" of estoppel against administrative exhaustion requirement).
c. The doctrine is applicable to bankruptcy cases even though the court may have concurrent jurisdiction with an administrative agency. See, e.g., United States v. James, 256 B.R. 479 (W.D. Ky. 2000) (debtor must follow administrative procedures for review of decision excluding him from Federal health care program participation); Welt v. Shalala (In re Hosp. Staffing Servs., Inc.), 258 B.R. 53 (S.D. Fla. 2000) (same, Medicare reimbursement); N.Y. Therapeutic Techs., Inc. v. Shalala (In re Orthotic Ctr., Inc.), 193 B.R. 832 (N.D. Ohio 1996) (same); Mid-Delta Health Sys., Inc. v. Shalala (In re Mid-Delta Health Sys., Inc.), 251 B.R. 811 (Bankr. N.D. Miss. 1999) (same); Winston v. Soc. Sec. Admin. (In re Winston), 1999 WL 401691 (Bankr. E.D. Pa. 1999) (party aggrieved by termination of Social Security benefits must exhaust administrative review process before seeking redress in court); 2045 Wheatsheaf Assocs. v. United States (In re 2045 Wheatsheaf Assocs.), 1998 WL 910228 (Bankr. E.D. Pa. 1998) (contracting officer's decision a jurisdictional prerequisite under Contract Disputes Act); In re S. Inst. for Treatment and Evaluation, 217 B.R. 962, 965 (Bankr. S.D. Fla. 1998) (another Medicare case, similar holding); Niagara Mohawk Power Corp. v. Megan-Racine Assocs. (In re Megan-Racine Assocs.), 180 B.R. 375, 382-83 (Bankr. N.D.N.Y. 1995) (debtor should exhaust administrative remedies at FERC before court hears issues); In re St. Johns Home Health Agency, Inc., 173 B.R. 238 (Bankr. S.D. Fla. 1994) (debtor cannot avoid Medicare's statutory requirement that it exhaust its administrative remedies prior to court having jurisdiction over matters "inextricably intertwined" with demands for Medicare funds); W.J.P. Props. v. RTC (In re W.J.P. Props.), 149 B.R. 604 (Bankr. C.D. Cal. 1992); In re Upsher Labs., Inc., 135 B.R. 117 (Bankr. W.D. Mo. 1991); see also Pugh v. FmHA, 846 F. Supp. 60 (M.D. Fla. 1994) (no jurisdiction over claim absent compliance with FTCA admin procedures), aff'd, 74 F.3d 1251 (11th Cir. 1995); Gosha v. Fed. Nat'l Mortgage Ass'n (In re Gosha), 59 B.R. 280 (Bankr. E.D. Pa. 1986) (FTCA claim against HUD dismissed where debtor's administrative claim was not "finally denied" by letter sent by certified or registered mail); Sharman Co. v. United States, 24 Cl. Ct. 763, 766 (1991) ("where the entitlement claimed derives from a contract that is subject to the provisions of the Contract Disputes Act . . ., then the adjudication of that entitlement is conditioned upon exhaustion of administrative remedies"). Compare AHN Homecare, L.L.C. v. Home Health Reimbursement and Health Care Fin. Admin. (In re AHN Homecare, L.L.C.), 222 B.R. 804, 812 (Bankr. N.D. Tex. 1998) (42 U.S.C. § 405(h) prohibits judicial review of controversies arising under the Medicare Act before exhaustion of all administrative remedies) with In re Healthback, LLC, 226 B.R. 464 (Bankr. W.D. Okla. 1998) (§ 405(h) does not state that 28 U.S.C. § 1334 is subordinate to 42 U.S.C. § 405; therefore, bankruptcy courts have jurisdiction over Medicare matters). See also In re Univ. Med. Ctr., 973 F.2d 1065, 1072-74 (3d Cir. 1992) (exhaustion of administrative remedies not required where adversary proceeding is based on Bankruptcy Code and does not involve issue inextricably intertwined with any dispute within agency's normal review process); United States ex rel. Rhodey (In re R & W Enters.), 181 B.R. 624, 642-45 (Bankr. N.D. Fla. 1994) (exhaustion of administrative remedies not required for cause of action relating to claim of the government against the bankruptcy estate; collects cases).
28 U.S.C. § 1452(a) permits removal of any claim or cause of action in a civil action to the district court for the district where the action is pending if such district court has § 1334 jurisdiction. [Exceptions: proceedings in U.S. Tax Court or to enforce police or regulatory power.] In any case, the court to which the action is removed may remand "on any equitable ground." Id. § 1452(b). Removal orders are not appealable. Id.; Things Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995); see In re United States Brass Corp., 110 F.3d 1261, 1265-66 (7th Cir. 1997); see also Belcufine v. Aloe, 112 F.3d 633 (3d Cir. 1997) (where action could have been brought originally in Federal court, defects in removal from state court were procedural, not jurisdictional, and subject to waiver).
5. Personal Injury and Wrongful Death Claims. District court must try. 28 U.S.C. § 157(b)(5). But see Baumgart v. Fairchild Aircraft Corp., 981 F.2d 824 (5th Cir. 1993) (district court may dismiss, under forum non conveniens doctrine, a bankruptcy-related wrongful death case that arose in a foreign country).
a. The Code provides that the bankruptcy judge may conduct a jury trial if (1) specially designated to exercise such jurisdiction by the district court, (2) the parties expressly consent, and (3) the right to a jury trial otherwise applies. 28 U.S.C. § 157.
The legislative history indicates that the 1994 amendment intended to resolve the conflict among the circuits regarding bankruptcy judges' authority to conduct jury trials. 140 Cong. Rec. H10766 (daily ed. Oct. 4, 1994). Compare Ben Cooper, Inc. v. Ins. Co. of Pa. (In re Ben Cooper, Inc.), 896 F.2d 1394 (2d Cir.) (bankruptcy courts have authority to preside at jury trials), vacated and remanded, 498 U.S. 964 (1990), aff'd, 924 F.2d 36 (2d Cir. 1991), and Bertholet v. Harman, 126 B.R. 413 (Bankr. D.N.H. 1991) (collecting cases) with Official Comm. of Unsecured Creditors v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122 (4th Cir. 1993), In re Grabill Corp., 967 F.2d 1152 (7th Cir. 1992), rehear'g denied, 976 F.2d 1126 (7th Cir. 1992), Raforth v. Nat'l Union Fire Ins. Co. (In re Baker & Getty Fin. Servs., Inc.), 954 F.2d 1169 (6th Cir. 1992), In re United Mo. Bank, 901 F.2d 1449 (8th Cir. 1990), and Kaiser Steel Corp. v. Frates (In re Kaiser Steel Corp.), 911 F.2d 380 (10th Cir. 1990) (all holding there is no authority for bankruptcy courts to conduct jury trials). See also Taxel v. Elec. Sports Research (In re Cinematronics, Inc.), 916 F.2d 1444 (9th Cir. 1990); Beard v. Brunstein, 914 F.2d 434 (3d Cir. 1990); Scotland Guard Servs. v. Autoridad de Energia Electrica (In re Scotland Guard Servs., Inc.), 179 B.R. 764 (Bankr. D.P.R. 1993) (all holding that bankruptcy court may not conduct jury trial if matter is non-core, related); see generally Jury Trials and Case Proceedings: The Bankruptcy Judge's Uncertain Authority, 65 Am. Bankr. L.J. 143 (1991); Symposium On Jury Trials In Bankruptcy Courts, 65 Am. Bankr. L.J. 1 (1991); Sabino, Jury Trials, Bankruptcy Judges and Article III: The Constitutional Crisis, 21 Seton Hall L. Rev. 258 (1991).
"The right to a jury trial in bankruptcy involves two separate inquiries - the existence of such a right, and the ability of a bankruptcy court to conduct a jury trial." Scotland Guard Servs. v. Autoridad de Energia Electrica (In re Scotland Guard Servs., Inc.), 179 B.R. 764, 767 (Bankr. D.P.R. 1993). While the 1994 amendment clarifies the statutory authority of bankruptcy courts to conduct jury trials, it does not necessarily resolve constitutional concerns. See In re Clay, 35 F.3d 190 (5th Cir. 1994) (suggesting that absent consent of the parties, bankruptcy court's conduct of jury trial would result in Art. III violation).
b. Parties are entitled to a jury trial for personal injury or wrongful death claims, which 28 U.S.C. § 157(b)(5) requires be tried in the district court. 28 U.S.C. § 1411. Section 1411 also permits issues arising under § 303 (involuntary filing) to be tried without a jury.
c. Non-Consenting Third Party. Although the Seventh Amendment does not prohibit Congress from assigning resolution of a dispute to a non-Article III tribunal that does not use a jury so long as claim asserts a "public right" (either matter arising between Government and others or seemingly "private" right that is closely intertwined with a Federal regulatory program), non-consenting (i.e., those who have not filed a proof of claim) parties may not be divested of their right to a jury in actions involving "private" rights (here fraudulent conveyance action). While restructuring of debtor-creditor relations in bankruptcy "may" be a "public right," action that seeks to augment the estate and does not involve creditors' claims to a pro rata distribution of the estate, involves a "private" right. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). But see RTC v. Pasquariello (In re Pasquariello), 16 F.3d 525 (3d Cir. 1994) (not clear that Congress was precluded from assigning fraudulent conveyance claim to a non-Article III adjudicative body that does not use jury); Consol. Indus. Corp. v. Welbilt Holding Corp., 254 B.R. 237 (N.D. Ill. 2000) (defendant can waive right to jury trial by failing to make timely motion for withdrawal of the reference);.
d. Creditor. By filing a claim, a creditor triggers the process of allowance and disallowance of claims thereby subjecting itself to the bankruptcy court's equitable power. "If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims- allowance process which is triable only in equity. As such, there is no Seventh Amendment right to a jury trial." Langenkamp v. Culp, 498 U.S. 42 (1990) (per curiam), rev'g, 897 F.2d 1041 (10th Cir. 1990); accord Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d 346 (9th Cir. 1996); Travellers Int'l AG v. Robinson, 982 F.2d 96 (3d Cir. 1992) (creditor who files a claim -- even a "protective and contingent" claim -- submits itself to the bankruptcy court's equitable jurisdiction and waives any Seventh Amendment right to a jury trial); In re United Mo. Bank of Kan. City, 901 F.2d 1449 (8th Cir. 1990); Ryan v. Loui (In re Corey), 892 F.2d 829 (9th Cir. 1989) (applying "claim filing rule" to uphold right of jury trial only for creditor who did not file a claim); see First Fid. Bank v. Hooker Invs., Inc. (In re Hooker Invs., Inc.), 937 F.2d 833 (2d Cir. 1991) (creditor can be forced to choose between filing a proof of claim and thereby losing its right to a jury trial, or forgoing proof of claim and preserving right to jury but risking loss of any distribution from estate); Beard v. Braunstein, 914 F.2d 434 (3d Cir. 1990) (debtor's action for rent under pre-petition lease against tenant who did not submit to bankruptcy court's jurisdiction is non-core matter and tenant has Seventh Amendment right to jury trial); Aaron Gleich, Inc. v. Housing Auth. of New Haven (In re Aaron Gleich, Inc.), 200 B.R. 464 (Bankr. D. Me. 1996) (creditor waived right to jury trial by filing proof of claim); Atl. Computer Sys., Inc. v. Mut. of Omaha Ins. Co. (In re Atl. Computer Sys., Inc.), 165 B.R. 781 (Bankr. S.D.N.Y. 1994) (creditor lost right to jury trial by participating in claims process even though no formal proof of claim filed); Schwinn Plan Comm. v. AFS Cycle & Co. (In re Schwinn Bicycle Co.), 184 B.R. 945 (Bankr. N.D. Ill. 1995); Murray v. Richmond Steel & Welding Co. (In re Hudson), 170 B.R. 868 (E.D.N.C. 1994); Shields v. Ciccone (In re Lloyd Sec., Inc.), 156 B.R. 750 (Bankr. E.D. Pa. 1993) (all holding that creditor's filing of counterclaim to trustee's claims against him was a sufficient invocation of court's "claim resolution" process to waive creditor's right to jury trial); Styler v. Jean Bob Inc. (In re Concept Clubs, Inc.), 154 B.R. 581 (D. Utah 1993) (creditor's assertion of affirmative defense of setoff in adversary proceeding did not waive creditor's right to jury trial); Valley Steel Prods. Co. v. DARCO (In re Valley Steel Prods. Co.), 147 B.R. 189 (Bankr. E.D. Mo. 1992) (while violation of automatic stay not entitled to jury trial, jury trial was required for common law counts alleging breach of contract); Chaplin v. Harbison Group (In re Friedberg), 131 B.R. 6 (S.D.N.Y. 1991) (suit in tort for rescission and restitution is equitable in nature; hence, no right to jury); Bowers v. McGladrey & Pullen (In re Fla. Hotel Props. L.P.), 163 B.R. 757 (W.D.N.C. 1994) (accounting firm did not waive jury trial right by submitting a fee application for post- petition services; fee application was not a "claim" because it was not a prepetition debt); see also Smith v. Dowden, 47 F.3d 940 (8th Cir. 1995) (claimant's jury trial right revived after withdrawal of proof of claim).
e. Debtor. Most courts hold that the debtor, by voluntarily filing a bankruptcy petition, waives its right to a jury trial. Compare N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496 (7th Cir. 1991) (comity with creditors who are forced to forego jury rights by filing a claim requires individual who voluntarily submits to the equity jurisdiction of the bankruptcy court by filing a petition has neither a Seventh Amendment nor a statutory right to a jury trial), In re McNaughton, 171 B.R. 65 (Bankr. W.D. Mo. 1994) (involuntary chapter 7 debtor not entitled to jury trial on issues raised in involuntary petition), Crews v. Lyons (In re Lyons), 200 B.R. 459 (Bankr. S.D. Ga. 1994) (debtor waived right to jury trial by filing petition), Auto Imports, Inc. v. Verres Fin. Corp. (In re Auto Imports, Inc.), 162 B.R. 70 (Bankr. D.N.H. 1993) (by voluntarily initiating reorganization case, debtor triggers claims allowance process, implicitly waiving right to jury, notwithstanding legal or equitable nature of the allegation in the underlying complaint), Martinson v. Towe (In re Towe), 151 B.R. 262 (Bankr. D. Mont. 1993), Taxel v. Marine Midland Bus. Loans, Inc. (In re Palomar Elec. Supply, Inc.), 138 B.R. 959 (S.D. Cal. 1992), and Haile v. R.J. Reynolds Tobacco Co. (In re Haile Co.), 132 B.R. 979 (Bankr. S.D. Ga. 1991) (chapter 11 debtor waived right to jury trial by filing adversary proceeding in bankruptcy court) with Germain v. Conn. Nat'l Bank, 988 F.2d 1323 (2d Cir. 1993) (where trustee's tort action against bank seeks only legal relief in the form of money damages, he is entitled to a jury trial under the Seventh Amendment). See also Smith v. United States (In re Smith), 205 B.R. 226 (B.A.P. 9th Cir.) (no right to jury trial in action by debtor against IRS where such right would not have been available in action against sovereign in 18th century common-law England), appeal dismissed, 127 F.3d 1106 (9th Cir. 1997); Leslie Salt Co. v. Marshland Dev., Inc. (In re Marshland Dev., Inc.), 129 B.R. 626 (Bankr. N.D. Cal. 1991) (chapter 11 debtor did not waive jury trial right by voluntarily filing petition; nevertheless, no right to jury for environmental action because it was the functional equivalent of a claim objection proceeding); Frost, Inc. v. Miller, Canfield, Paddock & Stone, P.C. (In re Frost, Inc.), 145 B.R. 878 (Bankr. W.D. Mich. 1992) (chapter 11 debtor has no right to jury trial on its objection to a proof of claim for prepetition attorney fees or on its counterclaim against the attorneys for negligence as these actions were an inextricable part of the claims allowance process); Citicorp N. Am., Inc. v. Finley (In re Washington Mfg. Co.), 133 B.R. 113 (M.D. Tenn. 1991) (trustee for chapter 11 debtor not entitled to jury trial in fraudulent conveyance against creditor which filed a proof of claim); Haile Co. v. R.J. Reynolds Tobacco (In re Haile Co.), 132 B.R. 979 (Bankr. S.D. Ga. 1991) (chapter 11 debtor waived right to jury trial by filing adversary proceeding in bankruptcy court); Longo v. McLaren (In re McLaren), 129 B.R. 480 (Bankr. N.D. Ohio 1991) (chapter 7 debtor who filed petition to avail himself of claims resolution process could not claim right to jury trial).
Most courts hold that bankruptcy courts have authority to issue civil contempt orders, and this grant is constitutionally permissible under Art. III where district courts provide de novo review of findings of fact and conclusions of law. Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447-50 (10th Cir. 1990). However, the circuits are not in complete agreement as to bankruptcy court's contempt powers. Compare Burd v. Walters, 868 F.2d 665 (4th Cir. 1989) (§ 105 authorizes sanctions for contempt) with Plastiras v. Isdell (In re Sequoia Auto Brokers), 827 F.2d 1281 (9th Cir. 1987) (bankruptcy courts do not have inherent civil contempt power and such power should not be implied from § 105). See also Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir. 1996) (bankruptcy courts have inherent power to sanction improper conduct; decisions under Fed. R. Bankr. P. 9011, which tracks Fed. R. Civ. P. 11, are reviewed only for abuse of discretion); Shervin v. Liebersohn (In re Shervin), 200 B.R. 109 (E.D. Pa. 1996); Headrick v. Ga. Dep't of Revenue (In re Headrick), 200 B.R. 963 (Bankr. S.D. Ga. 1996), aff'd sub nom. Ga. Dep't of Revenue v. Burke (In re Burke), 146 F.3d 1313 (11th Cir. 1998), cert. denied, 527 U.S. 1043 (1999); Mayex II v. Du-An Prods., Inc. (In re Mayex II Corp.), 178 B.R. 464, 469-70 (Bankr. W.D. Mo. 1995) (bankruptcy courts have authority to exercise civil contempt power). A "serious question" exists concerning the bankruptcy court's power to punish for criminal contempt a violation of an order. United States v. Guariglia, 962 F.2d 160, 162-63 (2d Cir. 1992) (holding that district court could punish for contempt a violation of a bankruptcy court order because the order is an order of both the bankruptcy court and the district court, of which the bankruptcy court is a unit); see also In re Lawrence, 164 B.R. 73 (W.D. Mich. 1993) (bankruptcy court lacks jurisdiction to conduct criminal contempt hearing and enter order against chapter 13 debtor).
Current Bankruptcy Rule 9020 provides that, with respect to findings of contempt for acts not committed in the presence of the bankruptcy judge, the bankruptcy court's ruling is subject to review in the manner provided in Rule 9033(b) which governs review of proposed finds of fact and conclusions of law in non-core proceedings. As noted above, the case law is split on whether bankruptcy judges have independent contempt authority, and the Advisory Committee on Bankruptcy Rules viewed current Rule 9020 as inappropriately staking out a substantive position on the question, i.e., that de novo review is required. Thus, Rule 9020 will be amended, as of December 1, 2001, simply to provide that Rule 9014, governing contested matters, will govern a motion for an order of contempt made by the United States trustee or a party in interest.
8. "Court of the United States."
Is a bankruptcy court a "court of the United States" as that term is used in various jurisdictional statutes? For the purpose of granting a motion to proceed in forma pauperis? Compare Perroton v. Gray (In re Perroton), 958 F.2d 889 (9th Cir. 1992) (no) with In re Woodman, 213 B.R. 53, 55 (Bankr. D. Conn. 1997) (no, but the district court's authority to consider such motions "flows to the bankruptcy court" as a "unit of the district court" by virtue of the order of reference). For purposes of the Equal Access to Justice Act? Compare Gower v. FmHA (In re Davis), 899 F.2d 1136 (11th Cir. 1990) (no) with O'Connor v. United States Dep't of Energy, 942 F.2d 771 (10th Cir. 1991), and Gumport v. ICC (In re Transcon Lines), 178 B.R. 228, 232 (Bankr. C.D. Cal. 1995) (yes). For awarding attorney fees in tax litigation under 26 U.S.C. § 7430? Compare United States v. Yochum (In re Yochum), 89 F.3d 661 (9th Cir. 1996) and Range v. United States, 245 B.R. 266, 279 (S.D. Tex. 1999) (yes) with IRS v. Brickell Inv. Corp. (In re Brickell Inv. Corp.), 922 F.2d 696 (11th Cir. 1991) (no). For awarding sanctions pursuant to 28 U.S.C. § 1927? Compare Jones v. Bank of Santa Fe (In re Courtesy Inns), 40 F.3d 1084, 1086 (10th Cir. 1994) (bankruptcy court not a "court of the United States," and lacks jurisdiction to impose sanctions under § 1927), Determan v. Sandoval (In re Sandoval), 186 B.R. 490 (B.A.P. 9th Cir. 1995) (BAP not "court of the United States"), Lauber v. Gremli (In re Lauber), 179 B.R. 712, 715 (Bankr. M.D. Fla. 1995) (bankruptcy court not entitled to award sanctions pursuant to § 1927 because it is merely a "unit" of the district court, not independent "court of the United States"), and In re Westin Capital Mkts., Inc., 184 B.R. 109, 117-18 (Bankr. D. Or. 1995) (following Courtesy Inns) with Baker v. Latham Sparrowbush Assocs. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 230 (2d Cir. 1991) (bankruptcy court may impose sanctions pursuant to § 1927), In re Volpert, 186 B.R. 240, 242-45 (N.D. Ill. 1995) (bankruptcy courts are "courts of the United States" for § 1927 purposes; collects cases), aff'd, 110 F.3d 494 (7th Cir. 1997) (discussing § 1927 but declining to decide issue; affirmed imposition of sanctions as authorized by 11 U.S.C. § 105 and Fed. R. Bankr. P. 9011), and In re French Bourekas Inc., 183 B.R. 695, 697 (Bankr. S.D.N.Y. 1995) (awarding sanctions under § 1927), aff'd, 195 B.R. 19 (S.D.N.Y. 1996). See also In re Dembrosky, 235 B.R. 245, 247 (Bankr. W.D.N.Y. 1999) (bankruptcy courts are not "courts of the United States" under 28 U.S.C. § 451 (Rules of Decision Act) but are generally viewed as enjoying that status derivatively as a unit of the district court), rev'd on other grounds sub nom., Chrysler Fin. Co. v. Schlant, 243 B.R. 613 (W.D.N.Y. 2000); accord In re Kliegl Bros. Universal Elec. Stage Lighting Co., 238 B.R. 531, 553 (Bankr. E.D.N.Y. 1999).
9. Article III Judicial Power.
See generally Land-O-Sun Dairies, Inc. v. Fla. Supermarkets, Inc. (In re Finevest Foods, Inc.), 143 B.R. 964 (Bankr. M.D. Fla. 1992) (28 U.S.C. § 157 accords with Art. III of the Constitution); see Gruntz v. County of Los Angeles, 202 F.3d 1074, 1080 (9th Cir. 2000)(separation of core and non-core proceedings "creates a distinction between those judicial acts deriving from the plenary Article I bankruptcy power and those subject to general Article III federal court jurisdiction"); Lebovits v. Scheffel (In re Lehal Realty Assocs.), 101 F.3d 272 (2d Cir. 1996) (distinction between core and non-core proceedings is intended to deal with problem of vesting Art. III judicial power in Art. I judges); Hudgins v. Shah (In re Sys. Eng'g & Energy Mgmt. Assocs., Inc.), 252 B.R. 635 (Bankr. E.D. Va. 2000) (discussing importance of "public rights" nature of bankruptcy proceedings to designation of "core" proceedings); Noonan v. Cellu Tissue Corp. (In re Palmer Trucking Co.), 201 B.R. 9 (Bankr. D. Mass. 1996). Although the bankruptcy court is not an Article III court, its jurisdiction is limited by the constitutional standing requirement. United States V. Amoskeag Bank Shares, Inc. (In re Amoskeag Bank Shares, Inc.), 239 B.R. 653, 657 n.3 (D.N.H. 1998).
10. Scope of the Court's Authority Under Selected Bankruptcy Code Sections.
The following subsection addresses 11 U.S.C. § 105 (the "all writs" section of the Bankruptcy Code) and proceedings "arising under" selected Code sections where the scope of the bankruptcy court's authority is often subject to controversy.
a. Power of the Court, § 105. Section 105 authorizes the bankruptcy court to issue any order necessary or appropriate to carry out the provisions of the Code.
"The Supreme Court has taught that any grant of authority given to the bankruptcy courts under § 105 must be exercised within the confines of the bankruptcy code." Gouveia v. Tazbir, 37 F.3d 295, 301 (7th Cir. 1994) (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988)). Thus, courts may not use § 105 to create substantive rights unavailable under the Code. See Taylor v. United States (In re Taylor), 263 B.R. 139 (N.D. Ala. 2001) (note: on appeal to 11th Cir.); MFS Telecom, Inc. v. Motorola, Inc. (In re Conxus Communications, Inc.), 262 B.R. 893, 899 (D. Del. 2001); Waugh v. Eldridge (In re Waugh), 165 B.R. 450, 451 (Bankr. E.D. Ark. 1994); see also In re One Times Square Assocs. Ltd. P'ship, 159 B.R. 695, 702 (Bankr. S.D.N.Y. 1993), aff'd, 165 B.R. 773 (S.D.N.Y.), aff'd, 41 F.3d 1502 (2d Cir. 1994) (§ 105 should be used sparingly and then only to supplement, not supplant, the Code).
The question of whether the court should issue an injunction under § 105 also turns upon the "traditional elements," i.e., irreparable harm, balance of hardships, likelihood of success on the merits, and public interest. Pac. Gas & Elec. Co. v. Cal. Pub. Utils. Comm'n (In re Pac. Gas & Elec. Co.), 263 B.R. 306, 321 (Bankr. N.D. Cal. 2001).
Courts do not always apply § 105 according to the above rules.
Bryan v. Rainwater, 254 B.R. 273 (N.D. Ala. 2000) (bankruptcy court used § 105 to enter writ of habeas corpus and declare void the revocation of debtor's probation for failure to make restitution payments. On appeal, the district court reversed, holding that the bankruptcy court lacked authority to issue a writ of habeas corpus because that power was reserved exclusively for the Supreme Court, circuit courts, and district courts. [Also, the state court's revocation of probation was excepted from the automatic stay under 11 U.S.C. § 362(b)(1) as a continuation of a criminal proceeding against the debtor.]
In re Dow Corning Corp., 255 B.R. 445 (E.D. Mich. 2000) (11 U.S.C. §§ 105 and 1123 authorized injunction prohibiting claimants from pursuing related claims against non-debtor third parties); In re American Family Enterprises, 256 B.R. 377 (D.N.J. 2000) (permanent injunction and third party release ordered under § 105 because of "exceptional or extraordinary circumstances," i.e., the discharges, releases and injunctions provided in the plan were essential to debtors' reorganization and were a condition precedent to payment of substantial sums to general unsecured creditors and consumer claimants that would not otherwise be available, and liquidation of the debtors' assets would yield no return to unsecured creditors); Boyd v. United States Dep't of Educ. (In re Boyd), 254 B.R. 399 (Bankr. N.D. Ohio 2000) (debtor failed to establish any of the three requirements for a hardship discharge of student loan debt under § 523(a)(8); nevertheless, the court felt the debtor should enjoy some of the benefits a bankruptcy brings in the form of debt relief and, therefore, under § 105(a), discharged past and future interest accruals); Morgan v. United States (In re Morgan), 255 B.R. 247 (Bankr. N.D. Ga. 2000) (§ 105 authorized tolling three-year lookback period for priority tax claims where debtors' prior chapter 13 case prevented IRS tax collection efforts; tolling limited to 70 days prior to filing of prior petition; dilatory conduct or bad faith on debtors' part need not be found for court to find equities in government's favor or exercise tolling authority).
Where the court approves a settlement agreement between the IRS and the debtors, and the debtors make a payment under such settlement to the IRS, and the case is later converted to chapter 7, the court cannot use its equitable powers under § 105 to order the IRS to disgorge the payment because, in hindsight, the settlement is not in the interests of creditors. The settlement must be upheld if, at the time the debtor seeks approval, it appears to be in the best interest of the estate. Schwab v. IRS (In re Shop N'Go P'ship), 261 B.R. 810, 815 (Bankr. M.D. Pa. 2001).
b. Automatic Stay, § 362. Subsection 362(d) of the Bankruptcy Code provides as follows: "On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay . . . such as by terminating, annulling, modifying, or conditioning such stay . . . ." 11 U.S.C. § 362(d). A request for relief from the stay is a "contested matter" commenced by a motion and governed by Bankruptcy Rule 9014. Fed. R. Bankr. P. 4001.
Relief from stay proceedings always relate to substantive rights and, thus, may implicate underlying substantive disputes. Where such disputes also lie within bankruptcy jurisdiction, it might seem to be inefficient and exalting form over substance to not resolve the underlying disputes along with the stay relief motion. Nevertheless, the mere relationship between the relief from stay motion and the underlying dispute does not confer upon the bankruptcy court jurisdiction to resolve the dispute within the relief from stay proceeding.
The hearing on a motion for relief from the automatic stay is (1) "merely a summary proceeding of limited effect," (2) "not a proceeding for determining the merits of the underlying substantive claims, defenses, or counterclaims," and (3) "merely a grant of permission from the court allowing the creditor to litigate its substantive claims elsewhere without violating the automatic stay." Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 31-35 (1st Cir. 1994); accord In re Vitreous Steel Prods. Co., 911 F.2d 1223, 1232-34 (7th Cir. 1990); Johnson v. Righetti (In re Johnson), 756 F.2d 738, 740 (9th Cir. 1985).
At the expedited hearing under subsection (e), and at all hearings on relief from the stay, the only issue will be the claim of the creditor and the lack of adequate protection or existence of other cause for relief from the stay. This hearing will not be the appropriate time at which to bring in other issues, such as counterclaims against the creditor on largely unrelated matters. Those counterclaims are not to be handled in the summary fashion that the preliminary hearing under this provision will be. In re Vitreous Steel Prods. Co., 911 F.2d 1231 (quoting H.R. Rep. No. 595, 95th Cong., 1st Sess. 344 (1977), U.S. Code Cong. & Admin. News, 1978, pp. 5787, 6300).
That the moving creditor's claim may be at issue does not mean that the stay relief proceeding is the proper forum to adjudicate the claim. "The validity of the claim or contract underlying the claim is not litigated during the hearing." Johnson v. Righetti (In re Johnson), 756 F.2d at 740; see also Ellis v. Parr (In re Ellis), 60 B.R. 432, 435 (B.A.P. 9th Cir. 1985) (stay litigation not "proper vehicle" to determine nature and extent of creditor's foreclosure rights). As most courts hold, the hearing involves "simply a determination as to whether a creditor has a colorable claim to property of the estate." Grella v. Five Cent Sav. Bank, 42 F.3d at 32; see also D-1 Enters., Inc. v. Commercial State Bank, 864 F.2d 36 (5th Cir. 1989) (legislative history of § 362(e) makes clear that counterclaims against creditor seeking to lift stay on largely unrelated matters are not to be handled in the summary fashion required by the expedited nature of the proceeding).
c. Tax Liability, § 505.
Although the bankruptcy court has jurisdiction to determine the amount or legality of Federal tax liability, the Internal Revenue Code's provision permitting abatement of interest reserves the authority to abate interest to the Secretary of the Treasury. Nor does the court have jurisdiction to review the Secretary's failure to abate interest, a decision committed by law to agency discretion. Karlsson v. United States (In re Karlsson), 247 B.R. 321 (Bankr. M.D. Fla. 2000); see also New Haven Projects Ltd. Liability Co. v. City of New Haven (In re New Haven Projects Ltd. Liability Co.), 225 F.3d 283 (2d Cir. 2000) (bankruptcy court has discretion to abstain from redetermining a debtor's tax liability where doing so would frustrate purpose of the statute), cert. denied, 121 S. Ct. 1093 (2001).
d. Turnover, § 542.
11 U.S.C. § 542, the turnover provision of the Bankruptcy Code, may not be used to acquire rights the debtor does not have as of the commencement of the case or to determine disputed rights to property; rather, it is intended as a remedy to obtain what is acknowledged to be property of the estate. Victoria Alloys, Inc. v. Fortis Bank SA/NV (In re Victoria Alloys, Inc.), 261 B.R. 424 (Bankr. N.D. Ohio 2001); Marlow v. Oakland Gin Co. (In re Julien Co.), 128 B.R. 987 (Bankr. W.D. Tenn. 1991), aff'd, 44 F.3d 426 (6th Cir. 1995).
Debtor cannot use § 542 to liquidate contract disputes or otherwise demand assets when their title is in dispute. United States v. Inslaw, Inc., 932 F.2d 1467 (D.C. Cir. 1991); see Charter Crude Oil Co. v. Exxon Co., U.S.A. (In re Charter Co.), 913 F.2d 1575 (11th Cir. 1990); FLR Co. v. Brant Constr. Co. (In re FLR Co.), 58 B.R. 632 (Bankr. W.D. Pa. 1985). But see Nat'l Enters., Inc. v. Koger P'ship, Ltd. (In re Nat'l Enters., Inc.), 128 B.R. 956 (E.D. Va. 1991) (debt may be both matured, and thus fall within scope of turnover proceedings, and nonetheless disputed by defendant, and thus, for action to be turnover proceeding, it is not relevant that defendant disputes existence of debt by, perhaps, denying complaint's allegations, as long as those allegations state existence of matured debt); Calhoun v. Copeland Corp. (In re Gordons Transports, Inc.), 51 B.R. 633 (Bankr. W.D. Tenn. 1985) (terms "matured, payable on demand, and payable to order" refer to debts that are presently payable, as opposed to those that are contingent and become payable only upon occurrence of certain act or event; thus, existence of dispute as to whether debt is owing does not preclude debt from being one that is "matured, payable on demand, or payable to order").
Shipping line's turnover claim seeking payment of withheld operating differential subsidy amount from Maritime Administration, Department of Transportation was not one for matured amount payable on demand or on order, given that actual withheld ODS amount had yet to be determined in accordance with proper administrative procedures and was subject to contractual dispute, and thus did not fall within bankruptcy section governing turnover of property to estate, so as to waive governmental agencies' sovereign immunity pursuant to bankruptcy provision establishing waiver of sovereign immunity to extent that order of bankruptcy court will bind governmental unit when court makes determination and issues order pursuant to Code section allowing court to bind creditor, entity, or governmental unit. Prudential Lines, Inc. v. United States Maritime Admin. (In re Prudential Lines, Inc.), 79 B.R. 167 (Bankr. S.D.N.Y. 1987).
In debtor's action alleging damages from breach of contract and interference with ability of debtor contractor to timely perform under contract, where legitimate dispute existed as to whether debtor was entitled to recover funds claimed due under contract, and resolution of action involved state law determination of defendant's liability under contract, proceeding was not true "turnover" proceeding and therefore did not constitute "core proceeding." Acolyte Elec. Corp. v. City of New York, 69 B.R. 155 (Bankr. E.D.N.Y. 1986), aff'd, 1987 WL 47763 (E.D.N.Y. 1987).
11. Res Judicata and Collateral Estoppel.
The doctrine of res judicata has two aspects: claim preclusion and issue preclusion. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994). Claim preclusion bars relitigation of any issue that was or might have been raised in a prior action between the same parties on the same cause of action concluding with a final judgment on the merits. Id. Issue preclusion (also called collateral estoppel) bars relitigation of any factual or legal issue that was actually decided in prior litigation between the parties whether on the same or a different cause of action. Id.
How principles of res judicata should apply in regard to bankruptcy proceedings may be difficult to determine at times. For example, in D-1 Enterprises, Inc. v. Commercial State Bank, 864 F.2d 36 (5th Cir. 1989), noting the two forms of adversary process in bankruptcy cases, i.e., adversary proceedings and contested matters, the court concluded that, as a general rule, res judicata does not apply to contested matters, which employ a "quick motion-and-hearing style." Id. at 39-40. However, in Iannochino v. Rodolakis (In re Iannochino), 242 F.3d 36 (1st Cir. 2001), under res judicata, the court's prior fee award to debtor's attorney barred debtor's malpractice claim even though the court awarded the fees in response to an application, which had commenced a contested matter, not an adversary proceeding.
In FCC v. NextWave Personal Communications, Inc. (In re NextWave Personal Communications, Inc), 200 F.3d 43, 54 (2d Cir. 1999), cert. denied, 531 U.S. 924 (2000), the Second Circuit reversed the bankruptcy court's holding that the FCC could not cancel certain licenses. On NextWave's further challenge to the cancellations, the D.C. Circuit held that claim preclusion was no bar because the Second Circuit's decision was based on the bankruptcy court's lack of jurisdiction rather than on the merits of the underlying dispute. NextWave Pers. Communications, Inc. v. FCC, 254 F.3d 130, 142-47 (D.C. Cir. 2001) [petition for cert. filed]. A substantive determination of an issue in connection with a jurisdictional holding can have issue preclusive effect but only if it is clear that the issue was actually and necessarily decided in the prior action. Id. at 147-49.
The Circuits are split on the question of whether res judicata effect is to be accorded judgments in both core and non-core proceedings. The Seventh and Fifth Circuits have held that non-core proceedings cannot be given res judicata effect because the bankruptcy court cannot enter a final judgment. Barnett v. Stern, 909 F.2d 973, 978-79 (7th Cir. 1990); Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183, 189-90 (5th Cir. 1990); see also I.A. Durbin, Inc. v Jefferson Nat'l Bank, 793 F.2d 1541, 1548 n.8 (11th Cir. 1986) (dicta). The Tenth, Ninth, Sixth and Second Circuits accord res judicata effect to judgments in both types of proceedings. Plotner v. AT&T Corp., 224 F.3d 1161, 1172-74 (10th Cir. 2000); Robertson v. Isomedix, Inc. (In re Int'l Nutronics, Inc.), 28 F.3d 965, 969-70 (9th Cir. 1994); Sanders Confectionery Prods., Inc. v. Heller Financials, Inc., 973 F.2d 474, 483 (6th Cir. 1992); Sure-Snap Corp. v. State Street Bank & Trust Co., 948 F.2d 869, 873-77 (2d Cir. 1991).
In re Robinson, 256 B.R. 482 (Bankr. S.D. Ohio 2000) (arbitration award should be given preclusive met standards for res judicata; effect upon financial rehabilitation not determinative because relief under the Bankruptcy Code is a privilege, not a fundamental right).
Patton v. United States Dep't of Educ. (In re Patton), 261 B.R. 44 (Bankr. E.D. Wash. 2001) (Creditor who received notice of but failed to object to debtors' confirmed chapter 13 plan could not attack plan post-confirmation, even though plan purported to discharge student loan debt in a manner inconsistent with Bankruptcy Code. The bankruptcy court stated it would not knowingly confirm any plan that contained language that attempted to discharge student loan obligations independent of an adversary proceeding to determine dischargeability, and that including such language might subject debtors' counsel to sanctions. Nonetheless, the court held that confirmed plans containing this language would be binding on all parties, and the student loan obligations would be discharged, unless the confirmation order was appealed or revoked.); see also Banks v. Sallie Mae Servicing Corp. (In re Banks), 261 B.R. 896 (Bankr. W.D. Va. 2001) (Lender failed to object to Chapter 13 plan which provided for full payment of principle on student loan debt, but provided that no interest would accrue during the pendency of the case. Although the court noted that the debtor should have brought an adversary proceeding to alter the terms of his non-dischargeable student loan, the court held that the policy favoring the finality of confirmation is stronger than the court and/or trustee's obligation to verify that a plan complies with the Code.); Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 218 B.R. 916 (B.A.P. 9th Cir. 1998) (over strong dissent by Judge Klein, held that creditor's failure to object to plan's discharge provision at confirmation hearing constituted waiver of its right to collect postpetition interest on non-dischargeable claim, even if provision was contrary to Code), aff'd, 193 F.3d 1083 (9th Cir. 1999).
In In re Matunas, 261 B.R. 129 (Bankr. D.N.J. 2001), debtors and the IRS entered into a stipulation which determined the amount of the government's secured, priority and unsecured tax claims for purposes of distribution under the debtors' confirmed plan. Thereafter, the IRS sought to collect additional taxes against the debtors, and the debtors moved to reopen their bankruptcy case to enforce the stipulation. The bankruptcy court held that the normal rules of res judicata apply to its decisions, and that the three circumstances for a prior judgment to be given res judicata, or claim preclusive effect under federal law were present: (1) the stipulation had the effect of a valid final judgment on the merits pursuant to 11 U.S.C. § 505(a)(1); (2) the debtor and the IRS were identical parties that entered into the stipulation; and (3) the IRS's claim grew out of the same transaction and occurrences that was the subject of the stipulation, i.e., for the same taxable years.
The doctrine of collateral estoppel applies in bankruptcy discharge and dischargeability proceedings. Krumhorn v. IRS (In re Krumhorn), 249 B.R. 295 (Bankr. N.D. Ill. 2000) (tax court's decision that debtor's transactions intentionally lacked economic substance precluded the bankruptcy court from separately inquiring into whether the debtor willfully evaded payment of taxes by filing a fraudulent return).
IRS v. Palmer (In re Palmer), 207 F.3d 566 (9th Cir. 2000) (taxpayer who failed to respond to IRS' allegations of fraud in Tax Court was not collaterally estopped from contesting the fraud in taxpayer's subsequent bankruptcy case; in essence, debtor defaulted in Tax Court, and issue of fraud was not "actually litigated").
In re DiSalvo, 219 F.3d 1035 (9th Cir. 2000) (chapter 11 debtor in possession is barred by claim preclusion from bringing claims that he could have raised in an earlier proceeding; debtor did not avoid claim preclusion by suing in capacity as debtor in possession rather than in individual capacity). But see Boberschmidt v. Soc. Nat'l Bank (In re Jones), 226 F.3d 917 (7th Cir. 2000) (trustee is not same entity as debtor for purposes of issue preclusion).