Circuit Split As to Whether § 1367 Confers Supplemental Jurisdiction on Bankruptcy Courts — Federal Courts Generally Decline to Exercise Supplemental Jurisdiction If Presented with First Impression Issue of State Law

From Rhiel v. Central Mortgage Co., 2011 Bankr. LEXIS 1008 (Bankr. S.D. Ohio Mar. 30, 2011):

It appears to be well-established that district courts have supplemental jurisdiction over all claims that are so related to claims asserted in a bankruptcy case or adversary proceeding that they form part of the same case or controversy. See, e.g., Edge Petroleum Operating Co. v. GPR Holdings, L.L.C. (In re TXNB Internal Case), 483 F.3d 292, 300 (5th Cir. 2007) ("Section 1367(a) provides for supplemental jurisdiction (subject to irrelevant exceptions) over claims forming part of the same case or controversy with 'any civil action over which the district courts have original jurisdiction.' This includes bankruptcy jurisdiction. It follows that district courts have supplemental jurisdiction over claims that form part of the same case or controversy with bankruptcy claims." (footnote omitted)) ***.

There is, however, a split of authority on the issue of whether bankruptcy courts may properly exercise supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a). See generally Eric C. Surette, Exercise of Supplemental Jurisdiction by Bankruptcy Courts Pursuant to 28 U.S.C.A § 1367, 52 A.L.R. Fed. 2d 243 (2011). The United States Court of Appeals for the Fifth Circuit and many other courts have held that bankruptcy courts are not authorized to exercise supplemental jurisdiction. See, e.g., Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 572--73 (5th Cir. 1995); Halvajian v. Bank of New York, N.A., 191 B.R. 56, 59 (D.N.J. 1995); Samson Res. Co. v. J. Aron & Co. (In re SemCrude, L.P.), No. 09-51520, 2010 WL 5140487, at *18 (Bankr. D. Del. Dec. 13, 2010); Scully v. Danzig (In re Valley Food Servs., LLC), 400 B.R. 724, 728--30 (Bankr. W.D. Mo. 2008); Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 353 B.R. 51, 59--63 (Bankr. S.D.N.Y. 2006); Dawson v. J&B Detail, L.L.C. (In re Dawson), No. 05-1463, 2006 WL 2372821, at *6 n.2 (Bankr. N.D. Ohio Aug. 15, 2006), aff'd, No. 106CV1949, 2006 WL 3827459 (N.D. Ohio Dec. 27, 2006); Wilcox v. Houghton (In re Houghton), 164 B.R. 146, 148 (Bankr. W.D. Wash. 1994). See also Patrick M. Birney & Michael R. Enright, May a Bankruptcy Court Exercise Supplemental Jurisdiction Predicated on its Referred "Related to" Jurisdiction?, 19 J. Bankr. L. & Prac. 1 Art. 1 (Jan. 2010) (taking the position that bankruptcy courts may not exercise supplemental jurisdiction under 28 U.S.C. 1367 and describing this as the majority view). According to the courts following the majority view, the exercise of supplemental jurisdiction would enable bankruptcy courts to adjudicate disputes that fall outside of their related-to jurisdiction, and "[i]t seems unlikely that Congress would have intended such a result, especially after carefully delimiting bankruptcy jurisdiction in [28 U.S.C.] § 157." Walker, 51 F.3d at 573. See also Chapman v. Currie Motors, Inc., 65 F.3d 78, 81 (7th Cir. 1995) ("[T]here is a serious question whether 28 U.S.C. § 1367 is applicable to bankruptcy cases. Indeed, we may assume it is not. But if it is not, this is mainly because it would step on the toes of the bankruptcy statute conferring 'related to' jurisdiction." (citations omitted)).

By contrast, the United States Court of Appeals for the Ninth Circuit and a number of other courts have held that bankruptcy courts may properly exercise supplemental jurisdiction. See, e.g., Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1195 (9th Cir. 2005); Century 21 Real Estate, LLC v. Prestige Realty Grp. of Ohio & Florida, LLC (In re Prestige Realty Grp. of Ohio & Florida, LLC), 420 B.R. 894, 898-99 (Bankr. S.D. Fla. 2009); Hospitality Ventures, 358 B.R. at 473-81; Pierce v. Conseco Fin. Servicing Corp. (In re Lockridge), 303 B.R. 449, 455 (Bankr. D. Ariz. 2003). According to courts following the minority view, district courts may rightfully refer to bankruptcy courts matters over which they have supplemental jurisdiction as readily as they may refer any other matters to bankruptcy courts. See Hospitality Ventures, 358 B.R. at 474. And, according to the court in Hospitality Ventures, such referred matters — although not "related to" claims within the meaning of Pacor's conceivable-effect test — are "'related to' the bankruptcy case by its nexus with the Debtor's primary claim arising under the Bankruptcy Code that triggers the supplemental jurisdiction principles of § 1367 and brings it within the district court's bankruptcy jurisdiction under § 1334(b)." Id. at 475.

The Sixth Circuit Court of Appeals has not yet addressed the issue of whether bankruptcy courts have the authority to exercise supplemental jurisdiction. And the Court need not decide the issue here. Assuming for the sake of this opinion only that it has the authority to exercise supplemental jurisdiction, the Court concludes that it is appropriate to decline to exercise such jurisdiction over the Third-Party Complaint. *** [P]ursuant to 28 U.S.C. § 1367(c), a court with supplemental jurisdiction over a claim may decline to exercise such jurisdiction if, among other things, "the claim raises a novel or complex issue of State law[.]" 28 U.S.C.A. § 1367(c). In addition to determining whether one of the predicates set forth in § 1367(c) exists, courts deciding whether to exercise supplemental jurisdiction also "should consider and weigh several factors, including the values of judicial economy, convenience, fairness, and comity [as well as] the avoidance of multiplicity of litigation, and . . . should . . . balance those interests against needlessly deciding state law issues[.]" Gamel v. City of Cincinnati, 625 F.3d 949, 951-52 (6th Cir. 2010) (citations and internal quotation marks omitted).

Considering the factors set forth above as well as § 1367(c)'s provision that a court may decline to exercise supplemental jurisdiction over a claim that raises a novel issue of state law, the Court concludes that it is appropriate to decline to exercise supplemental jurisdiction over the Third-Party Complaint.

First, the Third-Party Complaint appears to raise a novel issue of state law. As explained above, Seye asserts that he was an intended third-party beneficiary of a contract between a closing agent, Pillar, and a lender and that Pillar therefore owed a duty of care to him. He seeks to hold Pillar liable for a breach of this purported duty in connection with the closing of a mortgage on which he is one of the mortgagors, but which the Trustee is now seeking to avoid only to the extent of the Debtor's interest in the property and based solely on the purported defective acknowledgment of the Debtor's signature, not Seye's. In Ohio, a notary public may, under certain circumstances, be held liable for damages incurred in connection with the certification of an acknowledgment. Compare Keck v. Keck, 375 N.E.2d 1256, 1258 (Ohio Ct. App. 1977) (notary public found to be liable), with Walter E. Haller & Co. v. Fouse, 23 N.E.2d 453, 456 (Ohio Ct. App. 1939) (notary public held not liable). But the blank acknowledgment at issue here was made not by Pillar itself (who as a company would not be eligible to serve as a notary public), but rather by an individual whose services Pillar allegedly employed. Seye has not pointed to any Ohio cases addressing whether Pillar could possibly have any liability to Seye under such circumstances, and the Court's research has uncovered no authority for this proposition. Cf. Davis v. Lawyers Title Ins. Corp., No. 1:06 CV 357, 2007 WL 782158, at *3 (N.D. Ohio Mar. 13, 2007) (stating, in the context of a class-action lawsuit brought against a title company alleging overcharging for title insurance that "Ohio has not recognized a general fiduciary duty between a title insurance company and a borrower, and other jurisdictions have specifically held that no fiduciary relationship exists in that context"). Given the context in which Seye brings the Third-Party Complaint, it appears that it raises a novel issue of Ohio law. Other courts have declined to exercise supplemental jurisdiction under similar circumstances. See Donnell v. Kohler Co., No. 1:05-1139-T-AN, 2005 WL 3071784, at *6 (W.D. Tenn. Nov. 10, 2005) ("In this case, the court finds that Tennessee law is undefined on the issue of whether an employee may bring a common law negligence action against his employer [in this situation]. . . . Under these circumstances, the court concludes that its discretion would be more appropriately exercised by declining jurisdiction over Mrs. Donnell's common law negligence claims."); Alvarez v. Hi-Temp Inc., No. 03 C 2610, 2004 WL 603489, at *6 (N.D. Ill. Mar. 24, 2004) ("The court's jurisdiction over Alvarez's negligent supervision claim is supplemental under 28 U.S.C. § 1367(a). Where a state law claim raises a novel issue of state law, the court has discretion to decline to exercise supplemental jurisdiction over the claim. Courts generally decline to exercise supplemental jurisdiction if the issue of state law is one of first impression. Here, Alvarez's claim presents a question of first impression for Illinois courts, and thus presents a novel issue of state law. The court therefore opts not to exercise supplemental jurisdiction over the claim." (citations omitted)); Smolek v. Palos Park Police Dep't, No. 99 C 8001, 2001 WL 699946, at *4 (N.D. Ill. June 21, 2001) ("Defendants argue . . . that we should not exercise supplemental jurisdiction over Count IV because it raises a novel issue of Illinois law. In support thereof, defendants assert that Smolek has not pointed to, nor have defendants revealed, one . . . case that addresses the specific issue [presented here]. Our own search of Illinois case law has been just as fruitless. . . .Therefore, because [the] claim raises a novel issue of Illinois law, we decline to exercise supplemental jurisdiction." (citations omitted)). ***

Finally, the Court concludes that its declining to exercise supplemental jurisdiction is warranted here based on a consideration of the factors set forth in Gamel. As an initial matter, the Court finds that exercising supplemental jurisdiction would not necessarily adequately serve the interests of judicial economy or the convenience of the parties. There are at least two reasons that the Court's exercising supplemental jurisdiction would not serve those interests. First, an exercise of supplemental jurisdictional — if it is permissible at all — would, as the court in Hospitality Ventures explained, be appropriate only because the Third-Party Complaint is "'related to' the bankruptcy case by its nexus with the Debtor's primary claim arising under the Bankruptcy Code that triggers the supplemental jurisdiction principles of § 1367 and brings it within the district court's bankruptcy jurisdiction under § 1334(b)." Hospitality Ventures, 358 B.R. at 475. Thus, if it decided the Third-Party Complaint, the Court, as with matters that are within the Court's related-to jurisdiction in the Pacor sense, would be required to "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c). This would add a layer of review that would not exist if the Third-Party Complaint were brought as a separate claim in a state court. Second, there is no reason to believe that Pillar would not have a right to a jury trial on the claims asserted in the Third-Party Complaint, and the Court may conduct a jury trial only "if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties." 28 U.S.C. 157(e). Given the current posture of this matter — Pillar is seeking to dismiss the Third-Party Complaint — it would seem inevitable that Pillar will not consent to a jury trial being conducted before this Court. A state court, by contrast, would be able to conduct a jury trial.

Share this article:

Facebook
Twitter
LinkedIn
Email

Recent Posts

Archives