Rockland County businesses and individuals who are contemplating the filing of a petition in bankruptcy court rarely stop to wonder why Congress created a special court to handle bankruptcy cases. The creation of bankruptcy courts and the defining of their jurisdiction is a long and complicated history. A review of the last several decades of this history may help our readers understand why the bankruptcy court is different from other U.S. courts.
Article III of the Constitution creates a federal judicial system and gives Congress the power to establish the Supreme Court and such inferior courts as it deems necessary. Strangely enough, Article III does not mention bankruptcy. Instead, Article I, the article that establishes Congress and defines its powers, says that Congress may establish “uniform laws on the subject of bankruptcy throughout the United States.” The first Bankruptcy Act was passed in 1800 and replacement acts were passed in 1841, 1867, 1898 and 1978. Each of these statutes modified the jurisdiction of the bankruptcy courts, such as how the 1867 statute was the first to include provisions for corporate bankruptcies, and also responded to Supreme Court decisions that affected the jurisdiction of bankruptcy courts. In 1984, Congress passed the Bankruptcy Amendments and Federal Judgeship Act, which established bankruptcy courts as “units” of the district courts.
The bankruptcy courts have exclusive jurisdiction over cases involving the assets and debts of the bankrupt party. These cases are referred to as “core proceedings.” A second class of cases, known as “non-core” proceedings, has emerged. These cases may involve the assets or obligations of the bankrupt, but do not arise under the bankruptcy code. Non-core cases have an independent basis of federal jurisdiction, such as diversity of citizenship. In the complex bankruptcy proceedings that fill the courts, the distinction between core and non-core proceedings is often the subject of extended litigation. Non-core proceedings are usually decided by a federal judge after reviewing suggested findings of fact and conclusions of law submitted by the bankruptcy court.
Anyone contemplating filing a petition in bankruptcy court may wish to inquire about whether the case may involve any non-core proceedings. If such proceedings are begun, the cost of the bankruptcy may be greatly increased.