With certain exceptions, U.S. District Courts have original and exclusive jurisdiction of all cases under title 11 (the Bankruptcy Code) 28 U.S.C. § 1334(a). But U.S. District Courts may, however, “refer” any or all such proceedings to the bankruptcy judges of their district. 28 U.S.C. § 157(a). In certain situations, the U.S. District Court must withdraw a case or proceeding referred to the Bankruptcy Court and retake control of that case or proceeding, for example, where the resolution of the proceeding required consideration of both title 11 and other laws of the United State regulating organizations or activities affecting interstate commerce.
The Bankruptcy Court’s authority to hear certain matters was further limited by the United States Supreme Court’s decision in Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594, 180 L. Ed. 2nd 475 (2011). The Supreme Court held that only courts established under Article III of the United States Constitution, such as federal district courts, have the authority to enter final judgments on state law causes of action that exist without regard to any bankruptcy proceedings and do not derive from or depend upon any federal law or upon agency regulatory scheme.
This has led to challenges to the Bankruptcy Court’s jurisdiction to hear state law fraudulent transfer actions, breach of contract claims, and breach of fiduciary claims, amongst others.
The result of this ruling will likely cause the bankruptcy process to be longer and more expensive and force debtors to pursue state law claims outside of the bankruptcy court.