Tenth Circuit BAP: Bankruptcy Courts Have Exclusive Jurisdiction to Determine Whether Claims Are Estate Property

In Hafen v. Adams (In re Hafen), 616 B.R. 570 (B.A.P. 10^th Cir. 2020), a bankruptcy appellate panel from the Tenth Circuit ("BAP") held that the bankruptcy court is the only court with subject-matter jurisdiction to decide whether a claim or cause of action is property of a debtors' bankruptcy estate. As a consequence, the BAP held that the bankruptcy court abused its discretion by permitting a state court to determine whether creditors had "standing" to sue third-party recipients of allegedly fraudulent transfers. The decision illustrates the distinction between "bankruptcy standing" and "constitutional standing" to sue in federal courts.

Jurisdiction Over Estate Property in Bankruptcy

Federal district courts have "original and exclusive jurisdiction" of all "cases" under the Bankruptcy Code. 28 U.S.C. § 1334(a). District courts also have "original but not exclusive jurisdiction of all civil proceedings arising under" the Bankruptcy Code, "or arising in or related to cases" under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may (and do), however, refer these cases and proceedings to the bankruptcy courts in their districts, which are constituted as "units" of the district courts. 28 U.S.C. § 157(a).

A federal district court in which a bankruptcy case is commenced or pending also has exclusive jurisdiction over all of the debtor's property, wherever located, property of the debtor's bankruptcy estate (as defined in section 541(a) of the Bankruptcy Code), and all claims or causes of action involving the retention of bankruptcy professionals. 28 U.S.C. § 1334(e). Under section 541(a)(1), the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." Accordingly, claims and causes of action belonging to the debtor on the petition date are estate property. See In re Wilton Armetale, Inc., 968 F.3d 273, 280 (3d Cir. Aug. 4, 2020) (citing 11 U.S.C. § 541(a)(1); U.S. v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9 (1983); Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002)).

As the "representative of the estate" with the "capacity to sue and be sued" on its behalf (see 11 U.S.C. § 323(a), (b)), the bankruptcy trustee or, by operation of section 1107(a) of the Bankruptcy Code, a chapter 11 debtor-in-possession ("DIP"), has the exclusive authority to assert estate claims and causes of action. Armetale, 968 F.3d at 280. Thus, after a debtor files a bankruptcy petition, the debtor's creditors lack authority—sometimes referred to as "standing"—to assert claims that are estate property. Id.; accord In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir. 2014); Highland Capital Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petrol., Inc.), 522 F.3d 575, 584 (5^th Cir. 2008); Logan v. JKV Real Estate Servs. (In re Bogdan), 414 F.3d 507, 511–12 (4^th Cir. 2005).

In keeping with 28 U.S.C. § 1334(e), nearly all courts that have considered the question have concluded that the jurisdiction to determine what qualifies as estate property lies exclusively with the bankruptcy court. See, e.g., Brown v. Fox Broad. Co. (In re Cox), 433 B.R. 911, 920 (Bankr. N.D. Ga. 2010) ("It is generally recognized that '[a] proceeding to determine what constitutes property of the estate pursuant to 11 U.S.C. § 541 is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (E),' and that, '[w]henever there is a dispute regarding whether property is property of the bankruptcy estate, exclusive jurisdiction is in the bankruptcy court.'" (citations omitted)); accord Gardner v. U.S. (In re Gardner), 913 F.2d 1515, 1518 (10^th Cir. 1990); Brown v. Dellinger (In re Brown), 734 F.2d 119, 124 (2d Cir. 1984); Montoya v. Curtis (In re Cashco, Inc.), 614 B.R. 715, 722 (Bankr. D.N.M. 2020); In re DeFlora Lake Dev. Assocs., Inc., 571 B.R. 587, 593 (Bankr. S.D.N.Y. 2017); In re Brown, 484 B.R. 322, 332 n.2 (Bankr. E.D. Ky. 2012); Mata v. Eclipse Aerospace, Inc. (In re AE Liquidation, Inc.), 435 B.R. 894, 904–05 (Bankr. D. Del. 2010); Heolena Chem. Co. v. True (In re True), 285 B.R. 405, 412 (Bankr. W.D. Mo. 2002); Manges v. Atlas (In re Duval Cty. Ranch Co.), 167 B.R. 848, 849 (Bankr. S.D. Tex. 1994).

However, in the interests of justice or comity with state courts, a bankruptcy court may relinquish its exclusive jurisdiction to make that determination by abstaining under 28 U.S.C. § 1334(c)(1) in deference to another tribunal better suited to adjudicate the issue. See In re Ament, 2020 WL 354888, at *4 (Bankr. D.N.M. Jan. 21, 2020) ("Construing § 1334(c)(1) and § 1334(e) together, it is clear that, although the bankruptcy court has exclusive jurisdiction over property of the estate once a petition is filed, the bankruptcy court may choose to abstain from exercising its jurisdiction and modify the stay to allow a state court to divide community property."); accord In re Maxus Energy Corp., 560 B.R. 111, 120 (Bankr. D. Del. 2016); In re Thorpe, 546 B.R. 172, 177 (Bankr. C.D. Ill. 2016), aff'd, 569 B.R. 310 (C.D. Ill. 2017), aff'd, 881 F.3d 536 (7^th Cir. 2018).

Hafen

Several years before filing a chapter 7 case in 2004 in the District of Utah, securities broker-dealer Roy Nielson Hafen ("debtor") operated a Ponzi scheme that defrauded investors. Although the debtor's chapter 7 schedules listed the defrauded investors as creditors and the creditors were notified of the bankruptcy filing, the investors did not file proofs of claim or otherwise participate in the bankruptcy case. The debtor received a bankruptcy discharge in 2004.

Alleging that the debtor...