Post-Petition Consumer Claims in Bankruptcy: Do Bankruptcy Courts Have Jurisdiction to Hear Them?

Many consumers find that despite the fact that they receive a discharge creditors still attempt to collect debts and report false derogatory information on their credit reports. The Fair Debt Collection Practices Act (FDCPA) [1] and the Fair Credit Reporting Act (FCRA) [2] regulate debt collection and credit reporting. Bankruptcy judges have struggled with the limits of their jurisdiction in dealing with these types of post-petition claims. The Seventh Circuit Court of Appeals has split regarding the availability of FDCPA claims that are predicated upon the fact that a discharge has been entered. [3] Assuming the availability of an action, when do bankruptcy courts have jurisdiction to hear cases under the FDCPA and FCRA?

Both the FDCPA and the FCRA grant federal court jurisdiction to hear claims under these statutes. [4] Despite this fact, bankruptcy courts have routinely dismissed claims under both the FDCPA and the FCRA for lack of subject matter jurisdiction. [5] While evaluating subject-matter jurisdiction, those courts have focused their review on whether the consumer law claims fall into bankruptcy “related-to” jurisdiction found in 28 U.S.C. § 1334. In so doing, the courts have applied the test articulated in Pacor Inc. v. Higgins, [6] which essentially held that for a bankruptcy court to have related-to jurisdiction, the claims must impact the debtor and the estate. Pacor and the cases that follow its holding tend to be cases that involve state law claims against non-debtors brought in bankruptcy court. Pacor deals with an individual who sued Pacor for asbestos-related injuries. Pacor was not the debtor, but removed the case to bankruptcy court because Pacor reasoned that it would file third-party claims against the debtor and therefore, the litigation was related to the debtor’s bankruptcy. [7] However, the courts have held that unless the claims impact the debtor and the estate, bankruptcy courts do not have jurisdiction. [8] Federal consumer law claims will generally not affect the estate; therefore courts tend to dismiss the claims for lack of jurisdiction with the debtor left to refile her claims in federal district court.

However, the fact scenario in Pacor is far different than the cases that involve federal consumer protection statutes. First, when the debtor sues a debt collector for post-petition collection, he or she is a party to the action. Further, no one in Pacor seemed to argue that federal jurisdiction existed other than related to jurisdiction. Therefore, without bankruptcy jurisdiction, the claims must be sent to state court.

The FDCPA and FCRA both grant federal courts the jurisdiction to hear claims under these statutes. When bankruptcy courts rule that they do not have subject-matter jurisdiction to hear FDCPA or FCRA claims, but the federal district court did have jurisdiction, a question arises: Just who are bankruptcy judges if they are not judges in the district court?

Congress originally intended that bankruptcy judges be functionally independent of the district courts. However, the Supreme Court in Northern Pipeline Co. v. Marathon Pipe Line Co. [9] struck down the separation because it “impermissibly removed most, if not all, of the essential attributes of the judicial power from the [Article] III district court, and has vested those power in a non-[Article] III adjunct.” [10]

It is clear that bankruptcy judges are not independent of the district court. Following the 1984 amendments to the Bankruptcy Code, many courts ruled that bankruptcy courts are now just the name given to the district court judges assigned to hear bankruptcy cases.

The Volpert v. Ellis court stated that “[t]here is no ‘bankruptcy court’ per se as a separate legal entity. Instead, the phrase ‘bankruptcy court’ is merely a collective term of reference for all bankruptcy judges who serve within any district as judicial officers of the district court.” [11] The court also state the “[w]e use the words ‘bankruptcy court’ somewhat loosely...the bankruptcy court is no longer a distinct entity, but is a ‘unit’ of the district court.” [12]“Thus, ‘bankruptcy courts’ no longer exist as distinct jurisdictional entities, but rather have been subsumed within each district court.” [13]

“[T]here really is no bankruptcy court except in name. The term ‘bankruptcy court’ is solely a phrase that is applied to the bankruptcy judges for a district insofar as those judges together are a unit of the district court. 28 U.S.C. § 151. Thus while functionally there may appear to be a separate bankruptcy court, for jurisdiction purposes there is only one court, i.e., the district court.” [14] In light of the fact that bankruptcy judges are judges within the district court the question must be asked: How can the bankruptcy court rule that it does not have jurisdiction over a matter at the same time it rules that the district court has jurisdiction?

The Ninth Circuit has recently ruled that “the bankruptcy court’s subject-matter jurisdiction under the 1984 Act is coterminous with that of the district court.” [15 Indeed, bankruptcy jurisdiction is vested in the district court, not a separate court. [16] If the bankruptcy court is a separate court from the district court, then how does the bankruptcy court have jurisdiction over any bankruptcy matters?

Bankruptcy judges receive cases that are referred to them by the district court pursuant to 28 U.S.C. § 157(a). Therefore, if the bankruptcy court does not believe it may hear the matter, the proper procedure would be to withdraw the reference found in § 157 rather than to dismiss for lack of jurisdiction and have the debtor refile the case before the district court. To rule that the bankruptcy court does not have jurisdiction but the district court does have jurisdiction necessarily rules that the bankruptcy court and the district court are separate and distinct courts. This contradicts the statutory scheme and case law interpreting the role of bankruptcy judges.

Those who represent debtors in these types of actions would do well to assert jurisdiction other than simply claiming related to jurisdiction. Debtors should assert that the courts have federal question jurisdiction. Bankruptcy courts who do not believe they should hear these matters should consider whether the property remedy is to withdraw the reference to the bankruptcy court and have the matter referred back to the district court rather than make the ruling that the bankruptcy court does not have jurisdiction.