Commercial Litigation and Arbitration

Federal Jurisdiction — Intersection of Supplemental and Bankruptcy Jurisdiction

The first-impression issue posed by the Court in Wolinsky v. Oak Tree Imaging, LP, 2007 U.S. Dist. LEXIS 9431 (S.D. Tex. Feb. 9, 2007), was: ‛Can a district court exercise jurisdiction over a withdrawn adversary proceeding's state law claims that supplement the federal bankruptcy claim in another court?“ For those of us who don’t practice bankruptcy law, the question might be restated: Can a district court exercise supplemental jurisdiction over a state court claim that has been removed to federal court under the bankruptcy removal statute after the reference has been withdrawn by the bankruptcy court based on a finding that original bankruptcy jurisdiction did not exist? District Judge Gray H. Miller, in a thorough opinion, considered it unlikely that supplemental jurisdiction existed in these circumstances but held it unnecessary to decide the issue because he declined, as a matter of discretion, to exercise any supplemental jurisdiction that might exist. His reasoning explores the rationales of both supplemental (28 U.S.C. § 1367) and bankruptcy removal (28 U.S.C. § 1452(a)) jurisdiction and merits attention.

‛[T]here are two main reasons to question whether § 1367 confers jurisdiction over state-law claims in an adversary proceeding in one court that supplement a federal bankruptcy claim in another court. First, the bankruptcy claim and the withdrawn adversary proceeding have already been separated and will proceed independently of one another, thus vitiating supplemental jurisdiction's goal of trying closely related claims in one ‘proceeding.’... [Second,] the adversary [proceeding] did not begin life in the bankruptcy court; it was originally filed by plaintiff as a separate action in the state district court and removed to the federal system.... § 1452 only permits removal of cases in which the bankruptcy court has original jurisdiction. See § 1452(a). And as stated above, [the Bankruptcy Court] has held that the adversary is outside of that jurisdiction [and exercised only supplemental jurisdiction over the claim].... Thus, if the suit was originally not removable under § 1452, then this dispute can likely no longer be defined as an ‘adversary proceeding’ and should be viewed as an independent cause of action.“

The Court considered these ‛compelling reasons that counsel against the possibility of supplemental jurisdiction.“ It concluded that: ‛While the court finds that the claims in the adversary proceeding before this court form one ‘case or controversy’ with the pending claim in the bankruptcy court, it is unclear whether the withdrawn adversary and the separate bankruptcy case still form one ‘civil action’ [within § 1367(a)].“ Because the Court determined that it would decline to exercise supplemental jurisdiction to the extent that supplemental jurisdiction might exist, it remanded the adversary proceeding to the state court without resolving the first-impression issue that it analyzed.

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