California Court Explains Bankruptcy Court’s Jurisdiction Over Related Claims

Bankruptcy courts are courts of limited jurisdiction; generally, they only handle bankruptcy matters. While they can exercise jurisdiction over other claims, their authority is limited to claims that are related to or arise under or in bankruptcy. Thus, if a party attempts to bring a claim before a bankruptcy court and the court lacks jurisdiction, the claim will be dismissed, as demonstrated in a recent California case. If you have questions about what relief is available via bankruptcy, it is wise to talk to a California bankruptcy lawyer at your earliest opportunity.

Factual and Procedural Background

It is reported that in May 2016, the debtor filed for voluntary Chapter 11 bankruptcy. Almost a year later, the Bankruptcy Court converted the case to a Chapter 7 bankruptcy. Subsequently, the Bankruptcy Court approved the sale of most of the debtor’s assets to a second party for $78,000, along with a settlement and mutual releases. Before the asset sale, a third party raised various challenges to the sale and initiated an adversary proceeding against the second party in July 2020.

It is alleged that in July 2020, the third party began the adversary case. However, in December 2021, a bankruptcy judge ruled that even though the third party might have potential claims against the second party, the court lacked jurisdiction over the claims. The judge clarified that the claims did not fall under the categories of “arising under,” “arising in,” or “related to” the Bankruptcy Code. Consequently, the judge denied the third party’s request to amend the complaint and dismissed the adversary case due to lack of jurisdiction. The third party appealed.

Bankruptcy Court’s Jurisdiction Over Related Claims

On appeal, the court affirmed the bankruptcy court ruling. In doing so, it explained that 28 U.S.C. section 1334 grants bankruptcy courts original but not exclusive jurisdiction over civil proceedings arising under the Bankruptcy Code, those arising in bankruptcy cases, and those related to bankruptcy cases.

There are three statutory bases of bankruptcy jurisdiction: (1) proceedings that arise under the Bankruptcy Code involving claims grounded in its substantive provisions, (2) claims or proceedings arising in bankruptcy cases that would not exist outside of bankruptcy, and (3) cases related to bankruptcy with a broad scope encompassing matters affecting the administration of the confirmed plan.

The court ultimately determined that the third party’s claims did not arise under, arise in, or are related to the Bankruptcy Code, and therefore, the Bankruptcy Court did not have jurisdiction over them. Specifically, his claims involved a declaratory judgment to quiet title, a violation of the California Business and Professional Code of Conduct, and a claim for fraudulent transfer, which were independent of any bankruptcy proceeding.

Meet with an Experienced California Bankruptcy Attorney

People who have claims related to a bankruptcy action can pursue them before the bankruptcy courts, but the courts cannot resolve unrelated issues. If you have overwhelming debts and have questions about the process and procedure of filing for bankruptcy, it is smart to meet with an attorney.  Matthew D. Roy is an experienced bankruptcy lawyer in California who can assess the facts surrounding your debts and advise you on the best manner to proceed. You can contact Mr. Roy through the form online or by calling (916) 361-6028 to set up a conference.