The determination of dischargeability of a debt involves a two-step process: (1) the establishment of a valid prepetition debt owed by the debtor under applicable non-bankruptcy law and (2) a determination whether the debt is nondischargeable under Section 523 of the Bankruptcy Code. However, the question of whether a bankruptcy court has jurisdiction to enter money judgments on non-dischargeable debts has resulted in divergent opinions. These opinions can be categorized as either the “expansive approach” or the “limited jurisdiction approach.” Most published decisions adopt the expansive approach, concluding that bankruptcy courts do have power to enter money judgments on non-dischargeable debts. The jurisdictional predicate for this approach is found on the alleged close factual and logical relationship between the dischargeability proceeding and any proceeding on the underlying debt. The approach, therefore, relies on the theories of judicial economy and the bankruptcy courts’ inherent equitable power. See, In re Hallahan, 936 F.2d 1496, 1508 (7th Cir.1991) (bankruptcy courts have the power to liquidate debts in proceedings under Section 523(a)); In re McLaren, 3 F.3d 958, 966 (6th Cir. 1993) (bankruptcy courts can determine money damages in nondischargeability proceedings because bankruptcy courts are equitable courts that may decide all matters in dispute and give complete relief); In re Porges, 44 F.3d. 159, 164 (2d Cir. 1995) (“the entry of the money judgment … finds support in the bankruptcy courts inherent equitable powers”); In re Kennedy, 108 F.3d 1015, 1017-18 (9th Cir. 1997) (bankruptcy court acted within its jurisdiction in entering money judgment in nondischargeability proceeding); In re McGavin, 189 F.3d 1215, 1220 (10th Cir. 1999); In re Lang, 293 B.R. 501 (10th Cir. BAP 2003); and Dragisic v. Boricich (In re Boricich), 464 B.R. 335, 337 (Bankr. N.D.Ill. 2011).
In re Friedman, 300 B.R. 149 (Bankr. D.Mass. 2003) noted that Section 157(b) expressly provides that “bankruptcy judges may hear and determine * * * all core proceedings * * * and may enter appropriate * * * judgments.” Id. at 151. In addition, entry of money judgment promotes judicial economy and enable creditors to liquidate their claims for purposes of distribution. Finally, the court found that it had jurisdiction to enter a money judgment based on the necessity of liquidating claims for purposes of distribution in all but no asset cases. It noted that the function of determining the dischargeability of a debt and fixing the amount of the nondischargeable debt cannot be separated. Id.
A similar opinion was reached in In re McCurdy, 2019 WL 2343773 (Bankr. C.D.Ill. 2019). The Court noted that the first step in a dischargeability action is establishing the existence of a valid prepetition debt. Only then does the court determine whether the debt is nondischargeable. Thus, “[w]hen a complaint to determine the dischargeability of a debt is before the bankruptcy court prior to the entry of a judgment in a nonbankruptcy forum, * * * the bankruptcy court must necessarily determine liability and damages in order to establish the underlying debt.” Id. at *4 (emphasis added).
According to In re McClure, 625 B.R. 733, 738 (Bankr. C.D.Ill. 2021), a prepetition judgment evidencing the debt would satisfy the first step of establishing a valid prepetition debt. Where a creditor brings a dischargeability action in bankruptcy court without having first obtained a judgment in a non-bankruptcy forum, unless abstention would be appropriate to allow an action pending in another forum to proceed, the bankruptcy court must determine the existence and amount of the debt as a matter of non-bankruptcy law. The court stated:
Bankruptcy courts have both subject matter jurisdiction and constitutional authority to adjudicate state law claims as part of a dischargeability proceeding. The validity of a creditor’s claim is determined by the rules that define and apply to the cause of action under non-bankruptcy (usually state) law, including the burden of proof. If the plaintiff fails to establish the existence of a valid debt under non-bankruptcy law, the analysis ends without consideration of §523(a) and the defendant is entitled to judgment.
Id. at 738.
In In re Moore, 625 B.R. 896 (Bankr. N.D.Ill. 2021) took a less definitive position, suggesting the Seventh Circuit’s opinion in Hallahan may have impacted the court’s jurisdictional reach. It stated that there, the Seventh Circuit stated that a bankruptcy court hearing a Section 523 matter “could have declined to award damages and instead remitted the creditors * * * to their state-court remedies.” Id. 899 (quoting Hallahan at 1053.) The court noted, however, in that same opinion, the Circuit stated that the trial court should consider whether the parties might consent to the bankruptcy court’s adjudication as permitted by the Supreme Court. Id. at 899-900. As a result, the court in Moore concluded that it had jurisdiction, statutory authority and constitutional authority to hear and determine nondischargeability, it declined to enter a monetary judgment without the debtor’s consent. Id. at 900.
Courts adopting the limited jurisdiction approach conclude that bankruptcy courts do not have the power to enter money judgments on nondischargeable debts. One decision following the limited jurisdiction approach is In re Cambio, 353 B.R. 30 (1st Cir.BAP 2004) which quoted for support Ralph Brubaker, “On the Nature of Federal Bankruptcy Jurisdiction: A General Statutory and Constitutional Theory”, 41 Wm. & Mary L. Rev. 743 (March 2000) which stated:
[the] state-law claim on which a creditor seeks a money judgment does not “arise under” the Bankruptcy Code. Furthermore, it does not “arise in” the bankruptcy case under the standards set for “arising in” proceedings, because the creditor’s claim against the debtor would exist in exactly the same form even in the absence of the debtor’s bankruptcy filing. Indeed, that is precisely the upshot of the determination of nondischargeability. Thus, if the claim on the underlying debt is within the federal bankruptcy jurisdiction at all, is because it is “related to” the debtor’s bankruptcy case. Utilizing the Pacor test, however, because the only effect of any money judgment against the debtor would be to enhance the creditor’s future ability to collect the debt from the debtor’s post-bankruptcy income and assets and with no effect at all on property the bankruptcy estate or creditors’ claim against the estate, we would conclude that the claim is not “related to” the bankruptcy case. Indeed, the few courts that actually have confronted the jurisdictional issue with the announced standards have come to the same conclusion – there is no federal bankruptcy jurisdiction to enter a money judgment against an individual debtor on a nondischargeable debt.
Cambio further found the following facts determinative: First, the facts serving as the foundation for both causes of action (the dischargeability of the debt and the damages due to the breach of contract) were not inextricably intertwined, allowing for their severance and resolution by courts with unquestionable subject matter jurisdiction. Second, while adjudication of both causes of action by the bankruptcy court would promote the goals of judicial and the parties’ economy, only Congress could determine a lower federal court’s subject matter jurisdiction. Lastly, Cambio rejected arguments that the Committee Note to Interim Bankruptcy Rule 4003 authorized the bankruptcy court to enter judgments on the underlying cause of action for a breach of contract and or damages as, “it is axiomatic that such rules do not create a withdrawal federal jurisdiction.” See also, Condon Oil Co. v. Wood (In re Wood), 503 B.R. 705, 709-10 (Bankr.W.D.Wis.2013); and DeAngelis v. Antonelli (In re Antonelli), 2011 WL 5509494 (D.R.I.).
The court in In re Strauss, 523 B.R. 614 (Bankr. N.D.Ill. 2014) also followed the “limited jurisdiction approach.” While recognizing that in 1991 the Seventh Circuit specifically held that bankruptcy courts did have the power to liquidate debts in proceedings under Section 523(a), it noted that the decision pre-dated Stern v. Marshall. In Lee v. Christenson, 558 Fed.Appx. 674, 676 (7th Cir.2014), the court noted that Hallahan was a “pre-Stern decision. It declined to resolve the jurisdictional issue remarking only that it is “unclear whether Stern . . . restricts a bankruptcy court’s power to resolve a creditor’s state-law claim when the court decides whether that claim is nondischargeable.” Citing to Condon Oil Co. v. Wood (In re Wood), 503 B.R. 705, 709-10 (Bankr.W.D.Wis.2013), the court noted that the limited jurisdiction approach was “more consistent with Stern’s jurisdictional approach.
Matthew T. Gensburg