In a no-asset chapter 7 case, does the bankruptcy court have subject matter jurisdiction to determine the validity and dischargeability of a claim when the creditor was not required to and did not file a proof of claim? And if there is jurisdiction, is it core or non-core?
Bankruptcy Judge Alan M. Koschik of Akron, Ohio, answered both questions in the affirmative in his Sept. 30 opinion.
In large part, the answers to the questions are unclear because the Supreme Court has never definitively held or explained why the bankruptcy court has jurisdiction or power to determine the allowability of claims based on state law.
Judge Koschik’s case involved a husband and wife in chapter 7. They listed claims owing to an alleged student loan lender. The lender did not file a proof of claim because the trustee told creditors there were no assets for distribution and therefore no requirement to file proofs of claim.
The debtors initiated an adversary proceeding to determine that the student loans were dischargeable because they were obtained by fraud. More specifically, the debtors alleged that their daughter had forged their signatures on guarantees of loans taken out for the daughter’s education.
The lender filed a motion to dismiss, contending the bankruptcy court had no subject matter jurisdiction under 28 U.S.C. Section 1334. If there were jurisdiction, the lender argued that the claims were non-core under 28 U.S.C. Section 157. The lender lost on both arguments.
The lender argued that there was not even “related to” jurisdiction to decide the validity of a claim given the lack of an economic impact on an estate that had no assets.
Judge Koschik found jurisdiction under the Sixth Circuit’s “conceivable” effect test from the Wolverine Radio decision in 1991 because ruling on the validity of the claims “will affect the estate, empty though it may currently be.” Furthermore, he said, the court has “clear jurisdiction” to make rulings on dischargeability.
On the face of the complaint, the issues seemed to be core because both allowance of claims and dischargeability are denominated as core under Section 157(b)(2)(B) and (I). Although classified by statute as core, the question remained whether the Constitution would allow the bankruptcy court to issue a final judgment.
Even though the Supreme Court has yet to say whether or how bankruptcy courts have power to rule on the validity of claims under state law, Judge Koschik pointed to the Sixth Circuit’s Waldman v. Stone opinion in 2012 holding that bankruptcy courts can enter final judgments on the allowance of claims. In that case, the appeals court said that “all the intimations” from the Supreme Court point to a conclusion that bankruptcy courts can finally allow claims, a power “they have exercised for more than two centuries.”