Editor's Note: The following article, "Bankruptcy Jurisdiction's Constitutional Outer Limits" won the prize for second place in the Second Annual ABI Bankruptcy Law Student Writing Competition. The article discusses the difficulties that have arisen in court in the the deciphering of what qualifies as "related-to" a bankruptcy case when it comes to federal bankruptcy jurisdiction. The author, Jeremy Casper, is a recent graduate of the University of Iowa College of Law. In addition to recognition and publication of his article in the Bankruptcy Litigation Committee Newsletter, Mr. Casper receives a cash award of $750 and a one-year ABI membership.
The ABI Bankruptcy Law Student Writing Competition is led by the Hon. Judith K. Fitzgerald of the U.S. Bankruptcy Court for the Western District of Pennsylvania. Judge Fitzgerald is the Special Projects/Task Force Leader for the Bankruptcy Litigation Committee and is assisted by the committee leadership and members of the committee. The 2011 Competition will take place January 1, 2011 through March 1, 2011 and will once again award three prizes. To learn more, visit the competition website at http://papers.abi.org.
The jurisdiction of the bankruptcy courts to hear cases related to bankruptcy is not without limit…and there is a statutory, and eventually constitutional, limitation to the power of a bankruptcy court.[1]
The Constitution permits Congress to “establish…uniform Laws on the subject of Bankruptcies throughout the United States.”[2] Pursuant to this power, Congress has enacted a comprehensive Bankruptcy Code along with 28 U.S.C. § 1334, which confers federal subject-matter jurisdiction over proceedings “arising under” the Code, “arising in” a bankruptcy case or “related to” a bankruptcy case.[3] This “related-to” jurisdictional grant, first incorporated into the Code in 1978, is the most extensive in the country’s history. Federal courts have had a difficult time identifying standards to determine when a proceeding is sufficiently “related to” a bankruptcy “case” that it comes under the purview of federal jurisdiction. The Supreme Court has noted that nearly all circuits at least nominally embrace the test for related-to jurisdiction laid down by the Third Circuit’s Pacor decision,[4] which, in part, asks “whether the outcome of that [civil] proceeding could conceivably have any effect on the estate being administered in bankruptcy.”[5] However, application of this test, without further clarification or fleshing out, has produced inconsistent results.[6] Moreover, the Court has consistently refused to give definitive guidance to lower courts on the permissible scope of bankruptcy power.[7]
This article posits that, in the unique bankruptcy context, the “effect” focus of Pacor and its progeny is the correct basis for a test for related-to federal bankruptcy jurisdiction. The debtor’s estate, or res, is the Article III jurisdictional unit. A claim must have a direct economic effect on the bankruptcy estate for it to be logically “related to” a bankruptcy case and thus properly fall within federal jurisdiction. Since most third-party claims involve state law, courts should look to relevant state law to determine directness by asking whether the proceeding might create a duty to or on the part of the debtor and thus have the requisite effect on the estate.
Background
The permissible scope of bankruptcy courts’ jurisdiction has ebbed and flowed, culminating in the greatest possible grant of jurisdiction to bankruptcy courts. For most of the 20th century, federal bankruptcy jurisdiction was restricted due to the “relative inconvenience of the federal courts” as well as “widely held ‘states’ rights’ misgivings about conferring too much power on the federal courts.”[8] It was against this statutory background that Congress enacted the expansive related-to jurisdictional language contained in the 1978 Reform Act to promote judicial economy.[9] In the course of making these drastic changes, Congress did little to define the statutory language, and “the legislative history reveals virtually no regard for just how far ‘related-to’ jurisdiction extends. In fact, the only limitations suggested are whatever limits the Constitution imposes.”[10] Congress thus left it to the courts to identify these limits, which had largely remained unexplored.[11]
Struggles to Define the Limits of Expansive Federal Bankruptcy Jurisdiction
With this statutory background in mind, this article turns to an analysis of the way in which courts have defined the scope of related-to jurisdiction in light of Article III’s limitations.
Pacor: An Influential Effects Test
In Pacor, John Higgins and his wife brought a products-liability claim against Pacor, a supplier of asbestos. Pacor filed a third-party complaint impleading Johns-Manville Corp., a manufacturer of asbestos then in bankruptcy. Pacor sought to remove the entire proceeding to federal bankruptcy court and join it with the rest of the Manville bankruptcy. [12]According to the Pacor court, the basic principle underlying subject-matter jurisdiction is that “there must be some nexus between the ‘related’ civil proceeding and the [bankruptcy] case.”[13] The Pacor court announced an influential test for determining the appropriate nexus:
The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy…. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.[14]
The court rejected a more expansive fact-based test, finding that “the mere fact that there may be common issues of fact between a civil proceeding and a controversy involving the bankruptcy estate does not bring the matter within the scope of” federal bankruptcy jurisdiction. The court also summarily rejected the notion that judicial economy alone can justify federal jurisdiction.[15]
The court found that the Higgins-Pacor action was not sufficiently related to the Manville bankruptcy to create federal subject-matter jurisdiction over it.[16] The court noted that no indemnification agreement existed between Manville and Pacor, and Pacor was not a contractual guarantor of Manville’s obligations. Thus, the third-party dispute created no “automatic” liability and any effect on the debtor’s estate was speculative and would occur much later in time.[17] The court implicitly qualified the effects test with a requirement that the allegedly related claim must directly affect the estate, in the sense that it creates an immediate and definite effect on the debtor’s rights or liabilities. The later Supreme Court Celotex decision supported this understanding of the effects-based Pacor test by holding that a third-party action was related to a bankruptcy case where its outcome would have a “direct and substantialadverse effect on [the debtor’s] ability to undergo a successful reorganization.”[18]
Travelers: Second Circuit’s Analysis of Pacor and Supreme Court’s Failure to Give Guidance
The recent Travelers case dealt with the old case ofJohns-Manville, which filed for bankruptcy under the crushing weight of liability for asbestos-related injuries. In 1986, the bankruptcy court issued an injunction barring suits against Manville’s insurers and instead channeling them to a trust set up to pay claimants.[19] However, claimants later began asserting “direct actions” against Manville’s insurers in state courts. The bankruptcy court issued a 2004 order that enjoined these suits against the insurers. [20]
Now-Justice Sotomayor, writing for the Second Circuit Court of Appeals, held that “the district court lacked subject-matter jurisdiction to enjoin claims against the debtor’s insurers that were predicated, as a matter of state law, on Travelers’ own alleged misconduct and were unrelated to Manville’s insurance policy proceeds and the res of the Manville estate.”[21] Relying on Pacor, the Second Circuit stated that “a bankruptcy court only has jurisdiction to enjoin third-party non-debtor claims that directly affect the res of the bankruptcy estate.”[22] Critically, the Second Circuit “looked to the laws of the states where the claims arose” to determine whether the action would have a direct effect on the estate or, conversely, the claim created a legal duty between the third parties “independent” of the bankrupt’s estate.[23] The Supreme Court, on appeal, held only that the bankruptcy court’s initial 1986 orders had barred these suits and principles of finality and repose prevented a challenge based on lack of subject-matter jurisdiction.[24] The Court gave no guidance on the topic that the appellate court had presumed to be the crux of the case: “the outer reaches of a bankruptcy court’s jurisdiction.”[25]
Defining the Outer Limits of Federal Bankruptcy Jurisdiction
A properly defined Pacor effect-based analysis appropriately tests the constitutionality of a federal bankruptcy court presiding over a claim allegedly related to a bankruptcy case.
The Article III “Case” to Which Federal Jurisdiction Attaches Is the Debtor’s Estate
Article III states that “[t]he judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution [and] the Laws of the United States.”[26] In an ordinary federal question or diversity action, it is relatively clear that the jurisdictional unit or “case” is the cause of action between the parties.[27] However, the identification of the “case” as a jurisdictional unit becomes more difficult because a bankruptcy can be “a complex legal environment in which representatives of thousands of creditors and shareholders bargain over the disposition of billions of dollars in assets.” [28] Moreover, in bankruptcy, creditors assert numerous state-law claims not readily characterized as within federal jurisdiction. Defining the jurisdictional unit as individual bankruptcy proceedings seems inappropriate and question begging since the entire point of identifying the initial jurisdictional unit is to establish a basis from which to derive a test to determine precisely what claims are sufficiently “related to” that unit so as to be considered justiciable federal bankruptcy proceedings.[29]
Given the nature and purpose of federal bankruptcy proceedings, the Article III jurisdictional unit of substance should be the bankrupt’s estate. The Supreme Court has consistently suggested that the orderly distribution of a debtor’s estate is the primary purpose of federal bankruptcy laws.[30] The Bankruptcy Code also presents the debtor’s estate as the heart of federal bankruptcy jurisdiction.[31] Once federal bankruptcy jurisdiction is viewed in light of this commercial or economic function, it is easier to perceive the economic unit of the debtor’s estate rather than particular causes of action as the focal point of federal bankruptcy jurisdiction.[32]
Related-to Jurisdiction Allows Courts to Preside Over Cases that Impact a Debtor’s Estate
Federal courts historically recognized that it was within a bankruptcy court’s jurisdiction to entertain suits other than those that involve the property of the debtor’s estate, if they have a logical connection to the bankruptcy case.[33] Outside the bankruptcy context, the Supreme Court has more clearly held that federal courts can dispose of claims over which they have no independent Article III jurisdiction. In United Mine Workers v. Gibbs, the Court held that federal courts could maintain jurisdiction over a nondiverse state law claim if “the relationship between [an Article III federal question] claim and the state claim permits the conclusion that the entire action before the court comprises but one constitutional ‘case.’”[34] In this context, the Gibbs Court famously stated that “[t]he state and federal claims must derive from a common nucleus of operative fact” in order to be so related as to be part of the same “case.”[35]
However, a mere factual relationship between a claim and a bankruptcy case should not be sufficient to establish federal bankruptcy jurisdiction. In the nonbankruptcy context, the Article III “case” involves one party asserting a cause of action against another, alleging a violation of some legal duty based on a particular factual background that a court can readily compare to a different claim.[36] In the unique area of bankruptcy law, interpreting § 1334(b)’s related-to provision to grant federal bankruptcy jurisdiction over claims that merely demonstrate a factual nexus with any of the debtor’s assets or creditor-debtor relationships or disputes, most of which involve state law claims, would expand federal bankruptcy jurisdiction to dizzying heights. As Justice Scalia aptly stated in a different context, “applying the ‘relate-to’ provision [in ERISA’s preemption clause] according to its terms was a project doomed to failure, since, as many a curbstone philosopher has observed, everything is related to everything else.”[37] A stronger and more appropriate logical connection to the jurisdictional unit of federal bankruptcy, the res of the debtor’s estate, should be required.
A Test that Takes the Claim’s Effect on a Bankrupt’s Estate into Account Is Proper
The nature and purpose of federal bankruptcy law is to efficiently administer the debtor’s estate and provide disbursement of the debtor’s assets to creditors.[38] Federal bankruptcy courts thus primarily exercise jurisdiction over the debtor’s estate, defined as “all legal or equitable interests of the debtor in property as of the commencement of the case.”[39] Courts should recognize that, since the Article III “case” in the unique context of bankruptcy is primarily a financial unit that the court must administer, a claim is logically related to that unit if it affects the value of what is available for ultimate distribution to creditors. An effects-based test for subject-matter jurisdiction is relatively easy for courts to administer. Courts often determine the extent to which property held by third party nondebtors constitutes “property of the estate” that the automatic stay prevents creditors from taking.[40] Using the test set forth in this article, courts are likely to be able to determine whether a third-party claim will have a direct effect on the bankruptcy estate. Circuit courts have also found that this type of test adequately takes account of Congress’ intent for broad and efficient federal bankruptcy jurisdiction.[41]
The Effect Must Have a Direct Impact on the Debtor’s Estate
The ostensibly broad “could conceivably have any effect” language of Pacor belies its actual analysis, which properly required a direct connection to the estate in the sense that the third-party proceeding had to create a duty on the part of the debtor’s estate.[42]
An Unqualified Effects Test Is Overly Broad
This broad language in Pacor has led some courts to adopt an unqualified effects-based test for bankruptcy jurisdiction. Most notably, the Seventh Circuit has held that a dispute is “related to” a bankruptcy case if “it affects the amount of property available for distribution or the allocation of property among creditors.”[43] In most cases, this pure effects-based test will lead to the same results as a test that also asks whether the effect is derived from a duty to or on the part of the debtor’s estate. After all, the likelihood is that a third-party action that affects the value of the estate does so because the outcome results in an additional liability to or on the part of the estate.[44]
Yet in certain circumstances, a pure effects-based test for jurisdiction can produce results that are overbroad or downright absurd. In In re Time Construction, for example, the Sixth Circuit Court of Appeals endorsed such a test, reasoning that a third-party claim against a bankrupt debtor’s sole shareholder was “related to” the bankruptcy case because “[r]esolution of the state court action would have a substantial effect on the monetary value of [the debtor’s] shares, and thus would have a substantial effect on the value of [the] bankruptcy estate.”[45] Applying that reasoning, if a federal court concluded that a state action would affect the value of stock that happened to be an asset of the debtor, or maybe even of some other debtor’s estate, it would have jurisdiction over that action using an unqualified effects-based test.
More worrisome, though, is a potential result of this test that emerged from the Travelers decision’s factual scenario.[46] One of the reasons given by lower courts for federal jurisdiction over independent causes of action against Manville’s insurers was that “insurers would not contribute funds [to the Manville trust] without receiving assurances that any liabilities arising from or relating to their insurance relationships with Manville would be fully and finally resolved.”[47] By exercising jurisdiction, the court was able to increase the value of the estate through third-party contributions.[48] This is an improper exercise of jurisdiction based on judicial economy or convenience[49] and would allow a court and third parties to create jurisdiction where it does not otherwise exist.[50]
The Directness of the Impact Is to Be Determined by Reference
An effects-based test that actually relates the legal claim against the estate properly grounds federal bankruptcy jurisdiction within Article III’s bounds. The effect on the estate should stem from the creation of a right or duty on the part of the bankrupt’s estate. Courts often naturally embark on this sort of analysis when applying the Pacor test. In Matter of Zale, for example, the court concluded that state law tort claims between the debtor’s insurers were not “related to” the debtor’s bankruptcy case because “the tort claims do not implicate an independent obligation of [the debtor] in favor of [one of the insurers].”[51] This implicit requirement of a direct connection between the estate and the dispute in the form of an obligation to or on the part of the bankrupt has similarly aided other courts attempting to determine the outer bounds of “related to” federal jurisdiction.[52]
Explicit recognition of this crucial step in an effects-based test for federal bankruptcy jurisdiction would eliminate the difficulties associated with the pure effects-based test discussed above.[53] An express recognition of the importance of state law to the jurisdictional boundaries of federal bankruptcy courts would also go a long way towards easing the federalism tensions inherent in bankruptcy proceedings. As the Second Circuit Court of Appeals noted in the Travelers case, “[t]he importance of how a state defines these [third-party non-debtor] claims cannot be overlooked” since “drawing the duty line is a function of state and not federal law.”[54] Determining the effect on a bankruptcy estate by reference to the substantive law of the allegedly related dispute will ground related-to jurisdiction according to the realistic outcomes of disputes and prevent “the soaring jurisdiction afforded…in a universe where everything is related to everything else.”[55] The test in this article would appropriately balance the need to allow claims into bankruptcy for judicial economy with the need to keep federal jurisdiction in compliance with the dictates of Article III.
1. Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984).
2. U.S. Const. art. I, § 8, cl. 4.
3. 28 U.S.C. § 1334(b) (West 2009). Arising-under jurisdiction is similar to federal-question jurisdiction, while arising in proceedings “are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy.” In re Wood, 825 F.2d 90, 96-97 (5th Cir. 1987).
4. Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995).
5. Pacor, 743 F.2d at 994 (emphasis in original).
6. Ralph Brubaker, “On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory,” 41 Wm. & Mary L. Rev.743, 750 (2000) (“Pacor has produced a state of affairs in which jurisdictional determinations are essentially arbitrary-with countless instances of identical factual and procedural postures producing diametrically disparate results on nominal application of the same ‘test.’”).
7. See Travelers Indemnity Co. v. Bailey, 129 S.Ct. 2195, 2206 (2009) (upholding bankruptcy court’s broad injunction barring suits against third-party nondebtors on principles of finality and repose); Celotex, 514 U.S. at 309 (merely holding that third-party action was “at least a question ‘related to’ Celotex’s bankruptcy”).
8. Brubaker, supra note 6, at 765-66 (discussing 1898 Bankruptcy Act);see also Williams v. Austrian, 331 U.S. 642, 649 n.15 (1947) (noting that litigant inconvenience and expense provided impetus for 1898 Act’s provisions).
9. See Pacor, 743 F.3d at 994 (“Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.”).
10. Brubaker, supra n.6, at 799.
11. Understanding that courts might struggle to define the outer limits of bankruptcy jurisdiction, Congress attempted to provide a sort of safety valve in the form of 28 USC § 1334(c)(1), which allows a bankruptcy court to, “in the interest of justice, or in the interest of comity with State courts or respect for State law, . . . abstain from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” But this provision would not immunize bankruptcy courts from jurisdictional challenges when they decided to handle a claim related to a bankruptcy case.
12. Pacor, 743 F.2d at 986.
13. Id. at 994.
14. Id.
15. Id.
16. Id. at 995.
17. Id. (“At best, [the Higgins-Pacor] action is a mere precursor to the potential third-party claim for indemnification by Pacor against Manville. Yet the outcome of the Higgins-Pacor action would in no way bind Manville, in that it could not determine any rights, liabilities, or course of action of the debtor.”).
18. Celotex, 514 U.S. at 310 (emphasis added) (creditor dispute over bonded obligation of debtor in bankruptcy is within related-to jurisdiction of federal bankruptcy courts).
19. Travelers Indemnity Co. v. Bailey, 129 S.Ct. 2195, 2199 (2009). Under this scheme, the insurers agreed to settle disputes with the debtor regarding the scope of the debtor’s insurance coverage and fund the trust. Id.
20. Id. at 2200. The claimants alleged independent wrongdoing by the insurers under various state common law and statutory theories based on their association with or defense of Manville. Id.
21. In re Johns-Manville, 517 F.3d at 68.
22. Id. at 66.
23. Id. at 63.
24. Travelers, 129 S.Ct.. at 2206.
25. In re Johns-Manville, 517 F.3d at 55.
26. U.S. Const. art III, § 2, cl. 1.
27. Gully v. First National Bank, 299 U.S. 109, 112-13 (1936) (announcing series of requirements for determining “[h]ow and when a case arises ‘under the Constitution or laws of the United States’”).
28. Lynn M. LoPucki, “Bargaining over Equity’s Share in the Bankruptcy Reorganization of Large, Publicly Held Companies,” 139 U. Pa. L. Rev.125, 126 (1990).
29. But see Brubaker, supra n.6, at 835-44 (arguing that “bankruptcy ‘case…has no content in and of itself, but rather is defined by the various ‘proceedings’ over which the statute also grants the federal courts jurisdiction”).
30. See, e.g., Cent. Va. Cmty. Coll. V. Katz, 546 U.S. 356, 369 (2006) (bankruptcy jurisdiction is “principally in rem”); Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 447 (2004) (federal bankruptcy jurisdiction is “premised on the debtor and his estate, and not on the creditors”); Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) (distinguishing ancillary state contract disputes at issue from “[t]he restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power”).
31. 28 U.S.C. § 1334(e)(1) (West 2009) (bankruptcy court has exclusive jurisdiction “of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate”).
32. See The Federalist 42 (James Madison) (Congress’ “power of establishing uniform laws of bankruptcy, is so intimately connected with the regulation of commerce…that the expediency of it seems not likely to be drawn into question”).
33. Ex Parte Christy, 44 U.S. 292, 313 (1845) (under 1841 Bankruptcy Act, federal bankruptcy jurisdiction constitutionally extends to suits by trustee against third parties “since they are matters arising under the act, and are necessarily involved in the due administration and settlement of the bankrupt's estate”).
34. United Mine Workers of America v. Gibbs, 383 U.S. 715, 725 (1966).
35. Id. This was a formulation of what would become known as federal “supplemental jurisdiction,” now codified at 28 U.S.C. § 1367.
36. In Gibbs, for example, a union mine worker alleged violations of the federal Labor Management Relations Act as well as state anti-conspiracy common law based on the defendant’s conduct during a labor dispute. Id.at 718. Since substantially the same conduct on the part of defendant was the basis for both the federal and state actions, the Court had no trouble finding that “the state and federal claims arose from the same nucleus of operative fact and reflected alternative remedies.” Id. at 728.
37. California Div. of Labor Standards Enforcement v. Dillingham Constr. NA Inc., 519 U.S. 316, 335 (1997) (Scalia, J., concurring). ERISA preempts state laws “insofar as they…relate to any employee benefit plan.” Id.
38. See Matter of Xonics Inc., 813 F.2d 127, 131 (7th Cir. 1987) (“Adjusting competing claims of creditors to the property of a bankrupt is the central function of bankruptcy law.”).
39. 11 U.S.C. § 541(a)(1) (West 2009).
40. See, e.g., In re Nat. Century Financial Enterprises Inc., 423 F.3d 567, 575 (6th Cir. 2005) (holding that bankruptcy court properly enforced automatic stay to bar suit against JPMorgan, a nondebtor, to recover accounts receivable that “likely constitute property of the bankruptcy estate”).
41. See In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988) (“We conclude that the Pacor definition best represents Congress's intent to reduce substantially the time-consuming and expensive litigation regarding a bankruptcy court's jurisdiction over a particular proceeding. The Pacordefinition promotes another congressionally-endorsed objective: the efficient and expeditious resolution of all matters connected to the bankruptcy estate.”) (internal citations omitted).
42. Id. at 995 (finding that the Higgins-Pacor action was “[a]t best...a mere precursor to the potential third-party claim for indemnification by Pacor against Manville” and thus not “related to” Manville’s bankruptcy case); see generally supra Part III.A for a discussion of the Pacordecision. However, the test advocated in this article would not require the sort of “automatic” liability that the Pacor court did.
43. Xonics, 813 F.2d at 131 (holding that dispute between two creditors would be sufficiently related to bankruptcy if it “would affect the recoveries of other creditors under the plan of reorganization”) see alsoHome Ins. Co. v. Cooper & Cooper Ltd., 889 F.2d 746, 749 (7th Cir. 1989) (bankruptcy courts have jurisdiction over actions that “necessarily have a financial effect on the estate (or the apportionment among its creditors”).
44. This is probably why the Supreme Court, in Celotex, referred to the pure effects-based test as only a “slightly different test” than that announced in Pacor. Celotex, 514 U.S. at 308 n.6.
45. In re Time Construction Inc., 43 F.3d 1041, 1045 n.7 (6th Cir. 1995).
46. The jurisdictional issue in Travelers was the ability of a federal bankruptcy court to enjoin direct claims against a debtor’s insurers that were based on independent wrongdoing of the insurers. Johns-Manville, 517 F.3d at 64-65. As Justice Souter noted, the pure effects-based test can be essentially reformulated as granting jurisdiction over “any cases which, if contemplated, would have precluded the settlement that created the bankruptcy estate.” Transcript of Oral Argument at 34, Travelers, 129 S.Ct. (Souter, J.).
47. In re Johns-Manville Corp., 340 B.R. 49, 61 (S.D.N.Y. 2006).
48. Id. at 60.
49. Pacor, 743 F.2d at 994 (“Judicial economy itself does not justify federal jurisdiction.”). Judge Easterbrook has similarly rejected such a back-alley approach to federal jurisdiction:
Although the [claim between debtor’s insurer and a third party] has a nexus with the bankruptcy-in the sense that it would be convenient, and promote consistency, to resolve all questions concerning the policy at one go-it does not necessarily have a financial effect on the estate (or the apportionment among its creditors.
Cooper & Cooper, 889 F.2d at 749.
50. See Johns-Manville, 517 F.3d at 68 (calling lower court’s exercise of such expansive jurisdiction “jurisdictional bootstrap when no jurisdiction otherwise exists”).
51. Matter of Zale Corp., 62 F.3d 746, 756–57 (5th Cir. 1995).
52. See, e.g., In re Dow Corning Corp., 280 F.3d 648, 657-58 (6th Cir. 2002) (noting that subject-matter jurisdiction over third-party claims generally depend on “an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate”); Michigan Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1143 (6th Cir.1991) (holding that third-party action was related to bankruptcy case because debtor had agreed pursuant to reorganization plan to indemnify creditor, distinguishing cases where third-party claimant had no indemnification agreement and claimant was not a creditor); Robinson v. Michigan Consol. Gas Co., 918 F.2d 579, 583-84 (6th Cir.1990) (holding that suit against bankruptcy trustee was related to bankruptcy because if suit was successful, trustee would require reimbursement from estate);Wood, 825 F.2d at 94 (holding that claim against third party was related to bankruptcy because any liability would be shared by estate and third party).
53. For example, Chief Justice Roberts posed the following question to the proponent of the pure effects test in the oral argument for the Travelers case:
So, if part of the settlement—I mean, [debtor’s insurer] says, we need to get more out of this before we’re going to put in all the policy funds; the bankruptcy judge says, well, you are going to be immune from any traffic accident liability; and there is a traffic accident and Travelers said: Well, the bankruptcy court said I don’t have to pay. Is that all right? It’s within the jurisdiction as you read it because it involves Travelers [and] it’s related to the funds they submitted into the trust account.
Transcript of Oral Argument at 15, Travelers, 129 S.Ct. (Roberts, CJ). The proponent would not answer the question, but under the test announced in this article, the court would not have jurisdiction because such third-party claims do not even remotely implicate a duty to or on the part of the debtor’s estate.
54. Johns-Manville, 517 F.3d at 64.
55. Gerald T. Dunne, Editor’s Headnotes, “The Bottomless Pit of Bankruptcy Jurisdiction,” 112 Banking L. J. 957, 957 (1995).