Federal law assigns to U.S. district courts original jurisdiction over all cases under Title 11 (the Bankruptcy Code) and all civil proceedings arising under Title 11 or arising in or relating to Title 11. See 28 U.S.C. § 1334(a), (b). Federal law permits each U.S. district court to refer such cases and civil proceedings to bankruptcy courts, and district courts generally do so. But bankruptcy courts, unlike district courts, are not courts under Article III of the Constitution, and are therefore constrained in what powers they may constitutionally exercise. For example, the Supreme Court has repeatedly restricted a bankruptcy court’s power to enter final judgment in state-law claims brought by debtors against other parties. Recently, the Fourth Circuit addressed a converse question: whether bankruptcy courts are bound by the limits on Article III courts, in particular the constitutional bar on hearing a case that has become moot. The Fourth Circuit held that they are not so barred. Kiviti v. Bhatt, No. 22-1216 (4th Cir. Sept. 14, 2023).
The Fourth Circuit’s ruling occurred as part of deciding on another procedural question: finality. Adiel and Roee Kiviti had a dispute with Naveen Bhatt about a renovation that the Kivitis had hired him to perform on their home. They brought an action against him in D.C. Superior Court seeking recovery of the $58,770 they had paid him. Bhatt then filed for bankruptcy. The Kivitis filed a proof of claim and also brought an adversary proceeding, seeking a declaration that they were owed the $58,770 (Count I) and that the debt was non-dischargeable (Count II). The bankruptcy court dismissed Count II, holding that the debt was dischargeable to the extent it existed, and allowed Count I to go to trial. Apparently concluding that there was little use in litigating Count I by itself given the presence of the proof of claim, the parties agreed to stipulate to the dismissal of Count I (without prejudice to renewing it if Count II was restored on remand) and appeal. Such dismissal was necessary because ordinarily only a final bankruptcy order is appealable: an order only partially resolving a case (such as by dismissing a particular count) is insufficient. The district court affirmed the bankruptcy court’s ruling on appeal, and that decision was then appealed to the Fourth Circuit.
The Fourth Circuit held that the district court had lacked jurisdiction over the appeal. The Fourth Circuit concluded that the bankruptcy order was not a final order, because it had not fully resolved the adversary proceeding. The Fourth Circuit emphasized that parties may not avoid Congress’s limitations on appellate review by manufacturing finality through the voluntary dismissal of claims. Next, however, the Fourth Circuit addressed an exception to this principle: when a court dismisses some claims in a manner that renders it impossible for the remaining claims to be successful, a voluntary dismissal of the remaining claims can make the dismissal a final order. The Kivitis argued that this principle was applicable here. Once the bankruptcy court concluded that the debt was dischargeable, they argued, the adversary proceeding was moot: because a dischargeable debt could only be collected through the bankruptcy’s proof-of-claims process, and they had already filed a proof of claim, the bankruptcy court could not give them any effective relief. Because mootness deprived the bankruptcy court of jurisdiction, the Kivitis argued, the bankruptcy court’s order dismissing the non-dischargeability count (and therefore rendering the remaining claim moot) amounted to a final order.
The Fourth Circuit rejected this argument. The Fourth Circuit did not contest that the adversary proceeding may have been moot, but rejected the premise that mootness is fatal to a bankruptcy court’s jurisdiction. The court noted that the mootness doctrine stems from Article III’s limitation of the judicial power to cases and controversies. As such, the court reasoned, mootness does not apply of its own force to bankruptcy courts, which are not Article III courts. The mootness constraint does apply to the district court’s referral of a case or proceeding to a bankruptcy court, and to a district court’s review of a bankruptcy court’s ruling, but does not apply to a bankruptcy court’s exercise of jurisdiction over a case or proceeding.
The Fourth Circuit further concluded that Congress had not imposed this constraint on bankruptcy courts by statute. The court pointed to Congress’s broad grant of jurisdiction to bankruptcy courts to “hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section,” without any limitation to cases or proceedings that a district court could hear in its own right. See 28 U.S.C. § 157(b)(1). The Fourth Circuit stated that it would not impose limitations not imposed by the statutory text. The court also noted, but rejected, the reasoning of certain bankruptcy court decisions that Article III constrains bankruptcy court jurisdiction because district courts may withdraw referred cases or proceedings and because federal law refers to bankruptcy courts as “unit[s]” of a district court and to bankruptcy judges as “judicial officers” of the district court. See 28 U.S.C. § 151. Congress did not specify that bankruptcy courts lacked jurisdiction over cases or proceedings that district courts could not withdraw, and bankruptcy courts exercise power through their own grant of jurisdiction, not as mere adjuncts of district courts. Likewise, the Fourth Circuit declined to read the terms “cases” and “proceedings” in the statutory grant of jurisdiction to bankruptcy courts as incorporating Article III’s limitations.
Thus, the Fourth Circuit held, the bankruptcy court retained jurisdiction over the bankruptcy proceeding, and the bankruptcy court’s dismissal order was not a final order. The district court therefore lacked jurisdiction over the appeal and its order was vacated and remanded.