Bankruptcy Courts and Ancillary Jurisdiction: "Fah-get About It!"

It is natural to think that a federal case involving a multiplicity of armed parties sharing a common nucleus of operative facts should be waged in one massive armageddon (provided of course that federal jurisdiction is appropriately found in the initial instance). This concept of "ancillary jurisdiction" has been codified in 28 U.S.C. 1367, and applies in district courts throughout the land.

Bankruptcy litigation, however, is a horse of a different color, as Judge Schmetterer reminds us in In re Ha-Lo Industries, Inc. (2005 WL 2160087), and a trap for the unwary. That case reminds us that even a host of apparent connections to the debtor and the estate (fraudulent transfer action of hundreds of millions of dollars, partial settlements, filed proofs of claim, D&O indemnities, recoveries directly inuring to creditors' benefit) will not necessarily confer subject matter jurisdiction over a third party complaint.

Failure to remember that bankruptcy courts can't exercise ancillary jurisdiction (at least in the 7th Circuit--check your own circuit to be sure) can lead to much wasted time and effort and a sure loss of critical momentum.

The case does leave you wondering whether the third party complaint would have been dismissed had the third party plaintiffs first filed a motion to withdraw the reference of the case to the district court, which then presumably could have exercised ancillary jurisdiction over the third party complaint (assuming the motion were granted), even though the proceeding was initially commenced in the bankruptcy court. Worthwhile considering if you're faced with a similar situation.

© Steve Jakubowski 2005

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