In Re: Whittaker Clark & Daniels v.
PRECEDENTIAL
In re: WHITTAKER CLARK & DANIELS INC.,
Debtor
WHITTAKER CLARK & DANIELS INC; BRILLIANT NATIONAL SERVICES INC; L.A. TERMINALS INC.; SOCO WEST INC.
v.
BRENNTAG AG; BRENNTAG CANADA INC.; BRENNTAG GREAT LAKES LLC; BRENNTAG MID-SOUTH INC.; BRENNTAG NORTH AMERICA INC.; BRENNTAG NORTHEAST INC.; BRENNTAG PACIFIC INC.; BRENNTAG SOUTHEAST INC.; BRENNTAG SOUTHWEST INC.; BRENNTAG SPECIALTIES LLC (f/k/a Brenntag Specialties, Inc., and as Mineral and Pigment Solutions, Inc.); COASTAL CHEMICAL CO. LLC; MINERAL PIGMENT SOLUTIONS INC.; THOSE PARTIES LISTED ON APPENDIX A TO THE COMPLAINT; JOHN AND JANE DOES 1-1000; JULIET M. GRAY; KYUNG H. LEE
Official Committee of Talc Claimants,
Appellant
(D.C. Nos. 3:23-cv-04151; 3:23-cv-04156)
District Judge: Honorable Zahid N. Quraishi
On Appeal from the United States Bankruptcy Court for the District of New Jersey
(Bankr. Ct. Adv. Pro. No. 23-01245)
Bankruptcy Judge: Honorable Michael B. Kaplan
Argued on April 1, 2025
Before: KRAUSE, MATEY, and AMBRO, Circuit Judges
(Opinion filed: September 10, 2025)
Bryan Killian
MORGAN, LEWIS & BOCKIUS LLP
1111 Pennsylvania Avenue NW
Washington, DC 20004
Andrew J. Gallo
MORGAN, LEWIS & BOCKIUS LLP
One Federal Street
Boston, MA 02110
Counsel for Appellant Peter Protopapas
Matthew Kutcher
Miriam Peguero Medrano
COOLEY LLP
110 North Wacker Drive, Suite 4200
Chicago, IL 60606
Cullen D. Speckhart
Patrick J. Hayden
Michael Klein
Evan M. Lazerowitz
Jeremiah P. Ledwidge
Arielle Ambra-Juarez
COOLEY LLP
55 Hudson Yards
New York, NY 10001
Benjamin B. Sweeney
COOLEY LLP
1333 2nd Street, Suite 400
Santa Monica, CA 90401
Kathleen R. Hartnett [ARGUED]
COOLEY LLP
3 Embarcadero Center, 20th Floor
San Francisco, CA 94111
Cullen D. Speckhart
Carlton E. Forbes
Dale A. Davis
COOLEY LLP
1299 Pennsylvania Avenue NW, Suite 700
Washington, DC 20004
Allison W. O‘Neill
COOLEY LLP
10265 Science Center Drive
San Diego, CA 92121
Arthur J. Abramowitz
Ross J. Switkes
SHERMAN, SILVERSTEIN, KOHL, ROSE & PODOLSKY, P.A.
308 Harper Drive, Suite 200
Moorestown, NJ 08057
Kevin C. Maclay
Todd E. Phillips
Kevin M. Davis
Serafina A. Concannon
CAPLIN & DRYSDALE, CHARTERED
1200 New Hampshire Avenue NW, 8th Floor
Washington, DC 20036
Counsel for Appellant Official Committee of Talc Claimants
Rex W. Manning
Joseph M. Capobianco
KIRKLAND & ELLIS LLP
1301 Pennsylvania Ave., N.W.
Washington, D.C. 20004
Michael D. Sirota
Warren A. Usatine
COLE SCHOTZ P.C.
25 Main Street, 4th Floor
Hackensack, NJ 07601
G. David Dean
COLE SCHOTZ P.C.
500 Delaware Avenue, Suite 1410
Wilmington, Delaware 19801
Seth Van Aalten
Anthony De Leo
COLE SCHOTZ P.C.
1325 Avenue of the Americas, 19th Floor
New York, New York 10019
Paul D. Clement [ARGUED]
C. Harker Rhodes IV
Nicholas A. Aquart
CLEMENT & MURPHY, PLLC
706 Duke Street
Alexandria, VA 22314
Counsel for Appellees Whittaker, Clark & Daniels, Inc., Brilliant National Services, Inc., L. A. Terminals, Inc., and Soco West, Inc.
Seth Goldman
Bradley R. Schneider
Alexis Campbell
MUNGER, TOLLES & OLSON LLP
350 South Grand Avenue, 50th Floor
Los Angeles, CA 90071
Rachel G. Miller-Ziegler
Daniel J. Kane
MUNGER, TOLLES & OLSON LLP
601 Massachusetts Ave. NW, Suite 500E
Washington, DC 20001
Counsel for Intervenor-Appellees Berkshire Hathaway, Inc., National Indemnity Company, National Liability & Fire Insurance Company, BH Columbia Inc., Columbia Insurance Company, Ringwalt & Liesche Co., and Resolute Management, Inc.
OPINION OF THE COURT
AMBRO, Circuit Judge
Plagued by tort liability claims for distributing asbestos-contaminated talc, Whittaker, Clark & Daniels, Inc. (“Whittaker“) and its debtor affiliates filed for bankruptcy in 2023 seeking to dispose finally of those claims. Like many mass-tort bankruptcies, counsel contested Whittaker‘s from the beginning. On appeal, Appellants—the receiver appointed for Whittaker by a South Carolina Court and the Official Committee of Talc Claimants—raise two fundamental questions about Whittaker‘s bankruptcy: Should we be here at all given that, in their view, Whittaker‘s petition was improperly filed, and if rightly in bankruptcy, do its assets include certain tort claims relating to asbestos liability?
We conclude that Whittaker properly filed for bankruptcy and the Bankruptcy and District Courts correctly declined to dismiss its petition. We also determine that successor liability claims Appellants seek to assert against a nondebtor belong to the bankruptcy estates rather than individual creditors. Therefore, Whittaker may pursue those claims for the benefit of the estates. Accordingly, we affirm.
I. BACKGROUND
A. The Debtors’ Corporate History.
Whittaker and its three affiliated debtors—Brilliant National Services, Inc., L.A. Terminals, Inc., and Soco West, Inc. (collectively with Whittaker, the “Debtors“)—were processors, manufacturers, and distributors of various industrial chemicals and minerals, including talc. Through a series of corporate transactions—too tortured to recount in full here—the Debtors sold substantially all of their operating assets in 2004 to subsidiaries of Brenntag North America. As part of that transaction, the Debtors ceased to be operating entities, and Whittaker and Soco were left as shell companies to manage asbestos liability from the Debtors’ operating businesses. Whittaker, Brilliant, and Soco also took on the obligation to indemnify Brenntag and its affiliates for any liabilities it accrued from asbestos-related tort claims.
Three years later, National Indemnity Company—a subsidiary of Berkshire Hathaway Inc.—acquired Brilliant and L.A. Terminals, thereby indirectly acquiring
B. Proceedings in South Carolina.
Prior to the Debtors’ bankruptcy, plaintiffs across the country filed approximately 2,700 suits against the Debtors for asbestos-related torts. Our case concerns Sarah Plant‘s lawsuit in the South Carolina Court of Common Pleas. The suit followed Plant‘s diagnosis of mesothelioma (a form of cancer affecting the protective lining of the lungs) from asbestos-contaminated talc produced by Whittaker. In March 2023, a jury awarded her a $29 million verdict against it.
Days later, Plant moved the South Carolina Court to place Whittaker into receivership. The Court granted Plant‘s motion and entered an order (the “Receivership Order” or “Order“) appointing Peter Protopapas (the “South Carolina Receiver“) as Whittaker‘s receiver. The Receivership Order, among other things, vested the South Carolina Receiver “with the power and authority [to] fully administer all assets of [Whittaker], accept service on behalf of [it], engage counsel on behalf of [it] and take any and all steps necessary to protect the interests of [Whittaker] whatever they may be.” Appellants’ Consolidated J.A. 217.
Whittaker promptly moved the South Carolina Court to reconsider. It held a hearing on Whittaker‘s motion, during which, in response to counsel‘s suggestion that Whittaker had the “authority to enter into voluntary bankruptcy,” the Court stated:
I‘m well aware, that was the main factor in my signing the order so quickly is that I wanted to be sure that something other than [a] kind of amorphous organization I wasn‘t quite sure about in terms of asset picture, control[,] or anything else[,] would not simply declare bankruptcy and that entity would still be controlling things. I wanted a receiver that I knew would take it seriously, to look at the asset picture and see what was going on.
Id. at 423. The Court denied Whittaker‘s motion and directed the parties to submit a proposed form of order to memorialize its ruling.
C. The Debtors Petition for Bankruptcy.
The Debtors soon thereafter filed for bankruptcy in the United States Bankruptcy Court for the District of New Jersey. Whittaker‘s board passed a resolution beforehand authorizing the filing without gaining the approval of the South Carolina Receiver or consulting him. He promptly moved in the Bankruptcy Court to dismiss Whittaker‘s bankruptcy as an unauthorized petition, arguing that the Receivership Order “divested [its] board of the authority to approve a bankruptcy filing on [its] behalf and instead gave such authority to the Receiver alone.” Appellants’ Consolidated Opening Br. 13.
The Bankruptcy Court denied the South Carolina Receiver‘s motion, concluding that the Receivership Order did not remove the authority of Whittaker‘s board to file a bankruptcy petition because its terms did not demonstrate the South Carolina Receiver displaced the board. He appealed to the District Court, which affirmed the Bankruptcy Court‘s ruling for
Parallel with the South Carolina Receiver‘s appeal, Whittaker‘s bankruptcy proceeded in the Bankruptcy Court. In light of the substantial talc-related asbestos liability the Debtors face, the United States Trustee appointed the Official Committee of Talc Claimants (the “Committee“) to represent that constituency‘s interests during the bankruptcy proceedings.
In September 2023, the Debtors began an adversary proceeding—naming as defendants Brenntag, related entities, and hundreds of individual talc plaintiffs—seeking a declaratory judgment that successor liability claims against Brenntag premised on a “product line” theory of liability2 (the “Successor Liability Claims“) are property of the Debtors’ estates under
After rounds of unsuccessful mediation, in August 2024 the Bankruptcy Court granted summary judgment to the Debtors. It agreed that, under Emoral, the Committee‘s Successor Liability Claims are property of the Debtors’ estates and alternatively held that
The Bankruptcy Court had jurisdiction under
III. DISCUSSION
Before us are two issues, each with accompanying nuance. First, the South Carolina Receiver and the Committee contend that Whittaker improperly filed for bankruptcy because the South Carolina Court vested that authority exclusively in the South Carolina Receiver, meaning Whittaker‘s bankruptcy must be dismissed. Second, the Committee argues that the Bankruptcy Court incorrectly concluded that the Successor Liability Claims belong to the Debtors’ bankruptcy estates under our decision in Emoral. We review each in turn.
A. A Properly Filed Petition Is Not a Jurisdictional Prerequisite.
Before considering whether Whittaker properly entered bankruptcy, we encounter a predicate question: Does a properly filed petition affect a court‘s subject matter jurisdiction? Or is a valid petition instead a non-jurisdictional—but nonetheless integral—component of a bankruptcy case? We conclude it is the latter.
The Bankruptcy Code provides that, except in narrow circumstances, “on request of a party in interest, and after notice and a hearing, the court shall . . . dismiss a case under [Chapter 11] . . . for cause.”
The Supreme Court previously described this necessary component of the bankruptcy case as a limitation on courts’ “jurisdiction,” stating, in interpreting the predecessor statute to the Bankruptcy Code, “nowhere is there any indication that Congress bestowed on the bankruptcy court jurisdiction to determine that those who in fact do not have the authority to speak for the corporation . . . should be empowered to file a petition on behalf of the corporation.” Id. at 107 (emphasis added).
“Jurisdiction,” however, “is a word of many, too many, meanings.” Steel Co. v. Citizens for Better Env‘t, 523 U.S. 83, 90 (1998) (quoting United States v. Vanness, 85 F.3d 661, 663 n.2 (D.C. Cir. 1996)). And some courts have taken Price‘s mention of “jurisdiction” to mean a limitation on bankruptcy courts’ subject matter jurisdiction. See, e.g., In re Parks Diversified, L.P., 661 B.R. 401, 415–420 (C.D. Cal. 2024) (collecting cases); In re Mach I Aviation, Inc., No. 10-01225, 2011 WL 5838520, at *4 n.11 (B.A.P. 9th Cir. Sept. 15, 2011). Following that understanding, the absence of a properly filed petition would extinguish “a court‘s power to hear a case,” leaving it no choice but to dismiss it for lack of jurisdiction. Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006) (quoting United States v. Cotton, 535 U.S. 625, 630 (2002)).
But in recognition of jurisdictional limitations’ “unique potential to disrupt the orderly course of litigation,” recent Supreme Court cases exercise greater care before hanging the “jurisdictional label” on a statutory provision. Wilkins v. United States, 598 U.S. 152, 157–58 (2023). Today the standard for concluding a statute limits federal courts’ subject matter jurisdiction is an exacting one. While Congress need not employ any specific formulation or “incant magic words,” “the ‘traditional tools of statutory construction must plainly show that Congress imbued a procedural bar with jurisdictional consequences.‘” Boechler, P.C., v. Comm‘r, 596 U.S. 199, 203 (2022) (first quoting Sebelius v. Auburn Reg‘l Med. Ctr., 568 U.S. 145, 154 (2013); then quoting United States v. Kwai Fun Wong, 575 U.S. 402, 410 (2015)). Anything short of a clear indication will not do.
The statutes granting federal courts jurisdiction over bankruptcy cases do not attach jurisdictional significance to the propriety of a debtor‘s petition. The governing provision,
Code § 301(a), which does deal with bankruptcy petitions, provides only that a voluntary bankruptcy “is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.” This provision focuses on the commencement of a bankruptcy case by a debtor, not on the power to decide of the court. Simply put, § 301(a) “does not speak in jurisdictional terms,” Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 394 (1982), and we “will not lightly apply” the jurisdictional label to a provision absent a “clear statement” to the contrary, Wilkins, 598 U.S. at 158.
Accordingly, an improperly filed bankruptcy petition constitutes “cause” to dismiss a bankruptcy case,
B. Whittaker Properly Filed Its Bankruptcy Petition.
The Supreme Court has long held that, “[i]n the absence of federal incorporation,” “local law” governs a corporate debtor‘s authority to petition for bankruptcy. Price, 324 U.S. at 106. As corporations act through agents, “local law” is the non-federal rule that gives a corporation‘s agents—typically in those circumstances its board of directors—the “authority . . . to act.” Id. And because “[c]orporations are creatures of state law,” Burks v. Lasker, 441 U.S. 471, 478 (1979) (quoting Cort v. Ash, 422 U.S. 66, 84 (1975)), “it is state law which is the font of corporate
But which state‘s law governs? More precisely, in a situation such as this, where a South Carolina court has putatively exercised authority over the assets of a New Jersey corporation, do we assess the authority of Whittaker‘s board to file for bankruptcy with reference to New Jersey or South Carolina law?
Fortunately, the parties make answering this question easy. They agree that New Jersey law governs the authority of Whittaker‘s board over its internal affairs, like petitioning for bankruptcy. Appellants’ Second Supp. Br. 1; Appellees’ Second Supp. Br. 2, 11; Williams v. BASF Catalysts LLC, 765 F.3d 306, 317 (3d Cir. 2014) (where parties do not dispute governing law, we need not conduct a choice-of-law analysis). So the question becomes whether, under New Jersey law, the Receivership Order stripped Whittaker‘s board of the authority to file for bankruptcy. It did not.
While we stand far removed in time from the zenith of equity receiverships in this country, see David A. Skeel, Jr., Debt‘s Dominion: A History of Bankruptcy Law in America 56–60 (2001) (describing the rise of equity receivership in the late nineteenth century as a device for resolving corporate insolvency), this case proves that state courts retain the traditional equitable authority to appoint receivers for insolvent corporations. But that authority is not without limits, as this case also proves.
New Jersey law recognizes that “comity requires that [a foreign receiver] should be acknowledged and aided” to the extent that doing so is not “to the disadvantage of creditors resident [in New Jersey].” Stone v. N.J. & H.R. Ry. & Ferry Co., 66 A. 1072, 1073 (N.J. 1907). So where a foreign court appoints a receiver, New Jersey courts generally “will appoint an ancillary receiver, [and] the assets will be so administered that creditors in [New Jersey] and in the foreign jurisdiction shall fare alike.” Id.; accord Clark v. Painted Post Lumber Co., 104 A. 728, 728 (N.J. Ch. 1918) (recognizing that “after the appointment of the receiver in New York, [an ancillary receiver] was appointed” by a New Jersey court); Ware v. Supreme Sitting of Order of Iron Hall, 28 A. 1041, 1043 (N.J. Ch. 1894) (recognizing that an ancillary receiver was appointed in New Jersey and “should be regarded as auxiliary to the [foreign] receiver“).
New Jersey law authorizes its Superior Court to appoint receivers for New Jersey corporations. See
The Restatement (Second) of Conflict of Laws supports as much. In recognizing
Accordingly, under New Jersey law and settled choice-of-law principles, the South Carolina Receiver needed to move for, and be granted, recognition in New Jersey and the appointment of an ancillary receiver to displace Whittaker‘s board‘s control over, inter alia, the company‘s privileges, franchises and assets. It did not do so, meaning Whittaker‘s board retained authority over those corporate decisions reserved to it by New Jersey law, including the decision whether to reorganize by filing for bankruptcy.
Appellants respond by invoking one of our Nation‘s oldest laws—the Full Faith and Credit statute,
First, on its face, the Receivership Order does not reach as far as Appellants insist. Rather than extending to displace Whittaker‘s board‘s authority over corporate affairs, it purports only to give the South Carolina Receiver control of Whittaker‘s “assets” and the power and authority to “take any and all steps necessary to protect the interests of [Whittaker] whatever they may be.” Appellants’ Consolidated J.A. 217. Nowhere does the Order speak to Whittaker‘s corporate affairs, including the board‘s authority under New Jersey law to decide whether to file for bankruptcy.7 And in the absence of anything to the contrary in it, the default rule discussed above controls—namely, Whittaker‘s board controls the entity‘s corporate affairs, subject to lawful displacement under New Jersey law. Thus, because the Receivership Order on its own terms does not dictate the result Appellants assert, affording it full faith and credit under
Third, and more fundamentally, were the South Carolina Court to issue an order purporting to place the control of Whittaker‘s corporate affairs in the hands of the South Carolina Receiver, we doubt its ability to do so. Our system of federalism embodies “the fundamental principle of equal sovereignty” among the states. Nw. Austin Mun. Util. Dist. No. One v. Holder, 557 U.S. 193, 203 (2009). Implicit in that foundational organization of co-equal sovereigns is “the usual legislative power of a State to act upon persons and property within the limits of its own territory,” permitting “different communities to live with different local standards.” Nat‘l Pork Producers Council v. Ross, 598 U.S. 356, 375 (2023) (cleaned up).
But states’ power to exercise control over actors within their respective borders is not without limits. Indeed, the Constitution has a great deal to say about the relations between states, their authority to decide the rights of foreign parties, and the application of their laws in instances of conflict. For instance, the Due Process Clause of the
So it is no surprise that the Constitution limits the authority a state court can exercise over a corporation incorporated
But as Appellants would have it, that is precisely what the South Carolina Court did in this case. They contend that the Receivership Order, properly construed, “divest[ed]” Whittaker‘s board of authority to conduct the internal affairs of the corporation—including the authority to file for bankruptcy.10 Oral Arg. Tr. 15:17. As explained above, the Order, reasonably interpreted, does not extend so far. And if it did, it would be an unprecedented exertion of power over a foreign corporation whose internal affairs are governed by the laws of a sister state, and a radical intrusion into the province of a co-equal sovereign.
These constitutional infirmities provide an independent basis to reject Appellants’ appeal to
* * * * *
C. Successor Liability Claims Are Property of the Debtors’ Estates.
As Whittaker properly entered bankruptcy, we now turn to consider whether the Successor Liability Claims belong to the Debtors’ estates. We conclude they do.
At the outset of a bankruptcy case,
In order for a claim putatively held by a creditor to belong to the estate, two conditions must be met: (1) it must have existed at the outset of the bankruptcy, and (2) it must be a “general” claim, meaning one “with no particularized injury arising from it.” Emoral, 740 F.3d at 879 (quoting Bd. of Trs. of Teamsters Loc. 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002)). Whether a claim is “general” to all creditors or “personal” to a specific creditor calls for an “examin[ation of] the nature of the cause of action itself.” Id. In doing so, “we focus not on the nature of the injury, but on the ‘theory of liability.‘” Wilton Armetale, 968 F.3d at 282 (quoting Emoral, 740 F.3d at 879).
“General” claims are ones “based on facts generally available to any creditor, and [for which] recovery would serve to increase the pool of assets available to all creditors.” Emoral, 740 F.3d at 881. Contrast this with “personal” claims, which are “specific to the creditor” and in which “other creditors generally have no interest.” Id. at 879 (quoting Foodtown, 296 F.3d at 170). A claim is “personal” when the creditor‘s injury can be “directly traced” to wrongful conduct committed by the defendant, whether that be the debtor or a third party.
Wilton Armetale, 968 F.3d at 283 (quoting In re Tronox Inc., 855 F.3d 84, 100 (2d Cir. 2017)). A claim is “general” if the creditor‘s theory of liability depends on facts concerning the relationship between the defendant and another party—that is, “facts generally available to any creditor.” Emoral, 740 F.3d at 881.
We held that the plaintiffs’ successor liability claims against Aaroma were “general” claims and belonged to Emoral‘s bankruptcy estate rather than individual creditors. Id. at 880. Because they had not alleged “any direct injury” caused to them by Aaroma, the plaintiffs “fail[ed] to demonstrate how any of the factual allegations” were “unique to them as compared to other creditors of Emoral.” Id. at 879–80. While the plaintiffs “focus[ed] on the individualized nature of their personal injury claims against Emoral,” the same could not be said about their claims against Aaroma. Id. at 879. Their only theory of liability as to those claims depended on Aaroma‘s status as Emoral‘s successor, not its relationship with or conduct toward the plaintiffs.
This case mirrors Emoral, and that sounds the death knell for the Committee‘s argument.12 Start from the beginning: The Committee‘s theory of liability against Brenntag depends exclusively on the latter‘s relationship with the Debtors, not on any interaction with the individual claimants themselves. It attempts to hold Brenntag liable under a “product line” tort theory, which, to repeat note 2 above, “imposes strict liability for injuries caused by defects of a product line on a corporation that acquires the manufacturing assets of another corporation and undertakes essentially the same manufacturing operation and practices.” Appellant Committee‘s Opening Br. 33. While that theory of liability is distinct from the “mere continuation” theory advanced in Emoral, the Committee here—just as the plaintiffs in Emoral—seeks to impose the Debtors’ liability onto Brenntag solely due to its status as the Debtors’ successor, not because of any “particularized injury that can be ‘directly traced’ to [its] conduct.” Wilton Armetale, 968 F.3d at 283 (quoting Tronox, 855 F.3d at 100). So the Successor Liability Claims against Brenntag belong to the Debtors’ estates, meaning they are for the Debtors to pursue or settle, not the Committee.
The Committee challenges this logic on two fronts. It contends that “[t]he absence of an independent right under state law for the Debtors to bring on their own behalf at least a subset of the Successor Liability Claims . . . demonstrates that the Debtors cannot satisfy the first part of the Emoral test.” Appellant Committee‘s Opening Br. 32 (quoting Emoral, 740 F.3d at 879). For this assertion, the Committee calls out language from a footnote in Foodtown that “[a] cause of action is considered property of the estate if [1] the claim existed at the commencement of the filing and [2] the debtor could have asserted the claim on his own behalf under state law.” 296 F.3d at 169 n.5 (citing Butner v. United States, 440 U.S. 48, 54 (1979)). From this statement, the Committee seeks to add a third prong to that property-of-the-estate test, namely that a debtor must have a state cause of action to assert before filing for bankruptcy in order for a claim to be property of the estate.
But this argument divines too much from too little. Elsewhere in Foodtown itself, we recited the now-familiar standard noted above governing when claims become property of the estate: “In order for the claim to be the ‘legal or equitable interest of the debtor in property,’ the claim must be a ‘general one, with no particularized injury arising from it.‘” Id. at 170 (quoting St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir. 1989)). We reiterated that test in both Emoral and Wilton Armetale, see 740 F.3d at 879 & 968 F.3d at 282, and neither time did we impose an additional, freestanding condition that a debtor be able to pursue the cause of action under state law for it to become property of the estate. So while the ability to “assert[] the claim on his own behalf under state law” is enough to become property of the estate, it is not necessary. Foodtown, 296 F.3d at 169 n.5. Thus, any inability by the Debtors to assert the Successor Liability Claims against Brenntag outside of bankruptcy does not affect whether those claims are property of the estate inside bankruptcy.13
The Committee also argues that the Successor Liability Claims are not “general” because the theory of liability against Brenntag (the product-line theory) involves “specific claims exclusively belonging to victims injured by defective products,” and “[t]hey arise from harms unique to those victims based on conduct of the successor entity.” Appellant Committee‘s Opening Br. 33. Those claims do not inure to the benefit of all creditors, the Committee asserts, because they are only available to “personal-injury and environmental tort creditors; they do not include, for example, the Debtors’ various commercial and contract creditors.” Id. at 36.
While this argument may have intuitive appeal, our precedent has already rejected it. When assessing whether a claim is “general” or “personal,” we “focus not on the nature of the injury, but on the ‘theory of liability.‘” Wilton Armetale, 968 F.3d at 282 (quoting Emoral, 740 F.3d at 879). As the Committee presses a “product line” theory, we evaluate whether the facts necessary to establish liability under that theory are “generally available to any creditor.” Emoral, 740 F.3d at 881.
The product-line theory depends entirely on the successor‘s relationship with the manufacturer because it is the successor‘s acquisition and continuation of the “same manufacturing operation and practices” as the manufacturer that seeds potential successor liability to individual claimants. Appellant Committee‘s Opening Br. 33 (citing Ramirez, 431 A.2d at 820). That sort of pass-through liability—using the manufacturer as a conduit to reach the successor—was rejected in Emoral because the facts on which liability depended—the successor‘s relationship with the manufacturer—do not implicate a claim that is “specific to the creditor.” Emoral, 740 F.3d at 879 (quoting Foodtown, 296 F.3d at 170).
So too here. The talc claimants’ injuries do not stem from the nucleus of facts that underlay Brenntag‘s status as a
To be sure, the Committee correctly points out that its constituents have each suffered “harms unique to [them].” Appellant Committee‘s Opening Br. 33. Indeed, this echoes arguments raised in the Emoral dissent, which would have held that “[b]ecause the Diacetyl Plaintiffs’ underlying allegations are clearly individualized in nature, their claims against Aaroma—which seek to hold this third party liable for their alleged injuries as the ‘mere continuation’ of Emoral—must also be considered as individualized claims.” Emoral, 740 F.3d at 883 (Cowen, J., dissenting). The Emoral majority, however, rejected that focus on “the nature of the [underlying] injury,” instead returning to consideration of “the ‘theory of liability‘” and the facts on which it relies. Wilton Armetale, 968 F.3d at 282 (quoting Emoral, 740 F.3d at 879). And that analysis controls even though the harm suffered by some creditors “might be worse in degree than that suffered by other[s].”15 Id. at 283.
IV. CONCLUSION
Whittaker filed for bankruptcy after its board exercised its power to authorize the petition. The South Carolina Court could not divest Whittaker‘s board of that authority on its own, and, once appointed, the South Carolina Receiver had to move successfully a New Jersey court to displace the board. That did not occur (indeed, the attempt was not made), and Whittaker properly entered bankruptcy. Once there,
KRAUSE, Circuit Judge, concurring.
I join the majority opinion in full. As it persuasively explains, New Jersey law governs the authority of Whittaker‘s board to exercise corporate authority, and the South Carolina Court did not—and likely could not—unilaterally divest the board of that authority. Once in bankruptcy, moreover, our decisions in In re Emoral, 740 F.3d 875 (3d Cir. 2014), and In re Wilton Armetale, Inc., 968 F.3d 273 (3d Cir. 2020), straightforwardly dictate that the Successor Liability Claims are property of the estate under
Both parties ultimately agree that New Jersey law governs Whittaker‘s authority to petition for bankruptcy protection, but they also recognize that there are two distinct paths to that choice of law—the “forum state” rule of Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941), on the one hand, and a federal common law choice of law rule, incorporating the internal affairs doctrine, on the other. Here, because the forum state is New Jersey and because Whittaker is a New Jersey corporation, those paths converge. But, as highlighted in the parties’ briefing and argument on this question, each rule involves a different analysis and is capable of producing a different outcome. And confusion about how to resolve this conflict-of-laws question in bankruptcy cases will persist in our Circuit absent guidance from our Court. I write here with an eye towards that eventual resolution. As it turns out, the answer lies in established doctrine. For the reasons explained more thoroughly below, the Bankruptcy Code; Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), and the Rules of Decision Act; and the grant of bankruptcy jurisdiction to federal courts all support employing the choice-of-law rules of the state in which the bankruptcy court sits.
I. The Puzzle: Choice of Law in Bankruptcy
Federal courts are most often called on to resolve choice-of-law questions while exercising diversity jurisdiction. In those cases, non-federal law (usually state law) provides the rule of decision, Erie, 304 U.S. 64, and diverse parties might dispute which law governs their claims. When those candidate
Our Court has not previously determined whether the same rule applies in bankruptcy proceedings.1 But some of our sister circuits have entered this fray, coming to differing conclusions. The Eighth Circuit applies Klaxon in bankruptcy cases, directing that “bankruptcy court[s] appl[y] the choice of law rules of the state in which it sits,” In re Payless Cashways, 203 F.3d 1081, 1084 (8th Cir. 2000), and that “when some federal interest requires a different result,” the “appropriate question” is not choice-of-law but rather rule of decision, i.e., “whether the state [law] can trump the federal [law],” which it obviously cannot, In re Schriock Constr., Inc., 104 F.3d 200, 201–02 (8th Cir. 1997) (quoting Butner v. United States, 440 U.S. 48, 54 (1979)).2 The Ninth Circuit (and possibly the Fifth), on the other hand, have rejected Klaxon in bankruptcy cases and instead require a federal common law choice-of-law rule. See In re Lindsay, 59 F.3d 942, 948 (9th Cir. 1995); Wallace Lincoln-Mercury Co. v. Gentry, 469 F.2d 396, 400 n.1 (5th Cir. 1972). But see Fishback Nursery, Inc. v. PNC Bank, N.A., 920 F.3d 932, 935 (5th Cir. 2019) (describing Klaxon‘s application in bankruptcy as “an open question“). Finally, the Second and Fourth Circuits take a hybrid approach—applying Klaxon “in the absence of a compelling federal interest which dictates otherwise.” In re Merritt Dredging Co., 839 F.2d 203, 205–06 (4th Cir. 1989); see also In re Gaston & Snow, 243 F.3d 599, 607 (2d Cir. 2001) (applying Klaxon unless “significant federal policy, calling for the imposition of a federal conflicts rule, exists“). In other words, in contrast to the Eighth Circuit, which would accommodate any overriding federal interest by applying a federal rule of decision, these courts would reach the same result but under the auspices of a choice-of-law rule.
This tripartite circuit split has persisted for decades and created disparities in how bankruptcy courts determine which law governs parties’ rights and obligations. As I explain below, however, there is no basis to depart from the established rule from Klaxon, and, consistent with the Eighth Circuit‘s approach, any conflict-of-laws issue is properly resolved as a matter of rule of decision, not choice of law.
II. The Affirmative Case for Applying Klaxon in Bankruptcy
The reasons for extending Klaxon to bankruptcy are many and exceedingly strong. All relate to the structure of the Bankruptcy Code, the purposes the Code serves, and Erie and the Rules of Decision Act. I consider them in turn.
First, while bankruptcy provides an “orderly and centralized” process to restructure the debts of the honest but unfortunate debtor, 1 Collier on Bankruptcy ¶ 1.01[1] (16th ed. 2025), it does not create substantive property rights. Instead, consistent with the Rules of Decision Act,
As bankruptcy law takes parties’ property rights as it finds them, Butner, 440 U.S. at 55; Mission Prod. Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370, 381 (2019), the fact that parties find themselves wound up in a bankruptcy case should not work to alter the law that would otherwise govern their rights, cf. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 820 (1985) (rejecting notion that participation in a class action changes the substantive law governing individual plaintiffs’ disputes). But adopting a choice-of-law rule unique to bankruptcy risks just that and would subject identically situated parties to different governing laws simply by virtue of one dispute occurring in bankruptcy court while the other unfolds in run-of-the-mill civil litigation.4 Our bankruptcy
system does not demand—and, indeed, militates against—such a disparity. See BFP v. Resol. Tr. Corp., 511 U.S. 531, 544-45 (1994) (absent a clear and manifest conflict, “the Bankruptcy Code will be construed to adopt, rather than to displace, pre-existing state law“). And nothing in the text of the Code or the statutes granting bankruptcy jurisdiction warrants a departure from the ordinary rule of Klaxon. See Zachary D. Clopton, Horizontal Choice of Law in Federal Courts, 169 U. Pa. L. Rev. 2193, 2212 (2021).
Second, influential bankruptcy scholarship buttresses this conclusion. As renowned scholars have advocated, the bankruptcy system in many ways “mirror[s] the agreement one would expect the creditors to form among themselves were they able to negotiate such an agreement from an ex ante position.” Thomas H. Jackson,
Viewed through this lens, among its other features, bankruptcy facilitates the orderly resolution of competing creditor entitlements that exist under governing non-bankruptcy law. Such a system takes as a given creditors’ preexisting property interests and “does not . . . justify the implementation of a different set of relative entitlements, unless doing so is necessary as a part of the move from the individual remedies system” that exists outside of bankruptcy. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 21 (1986).
True, the Bankruptcy Code does change parties’ “relative entitlements” in some circumstances in aid of debtor rehabilitation. See, e.g.,
Third, extending Klaxon to the bankruptcy context is fully consistent with—
In the bankruptcy arena, the Bankruptcy Code supplies the federal rules of decision that Congress has deemed necessary to effectively govern the relationship between the debtor and its creditors. Even a cursory review of the Code‘s “hundreds of interlocking rules,” Harrington v. Purdue Pharma L.P., 603 U.S. 204, 209 (2024), reveals that Congress took care to include many provisions that aim “to protect [] national” interests, In re Trib. Co. Fraudulent Conveyance Litig., 946 F.3d 66, 94 (2d Cir. 2019); see, e.g.,
As these provisions illustrate, Congress identified and manifested in the Code the specific federal interests it wished to protect; it did not leave readers to divine untold rules from some brooding cloud of federal interests hanging over bankruptcy. As we invariably do when construing federal statutes, we look to its text to discern meaning, In re Imerys Talc Am., Inc., 38 F.4th 361, 375 (3d Cir. 2022), and we “presume that [Congress] says in a statute what it means and means in a statute what it says,” Conn. Nat‘l Bank v. Germain, 503 U.S. 249, 253-54 (1992). So while “the Bankruptcy Clause confers broad authority on Congress,” Siegel v. Fitzgerald, 596 U.S. 464, 476 (2022), to establish “uniform Laws on the subject of Bankruptcies,”
This is a glaring omission in a sea of provisions relating to bankruptcies and not one we should presume Congress simply overlooked. To the contrary, we must respect the presumption that state law governs “until Congress strikes a different accommodation.” United States v. Kimbell Foods, Inc., 440 U.S. 715, 740 (1979). It is not the role of federal courts to extend federal interests beyond those Congress has prescribed. See Tex. Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 641 (1981); In re One2One Commc‘ns, LLC, 805 F.3d 428, 444 (3d Cir. 2015) (Krause, J., concurring); cf. Cassirer v. Thyssen-Bornemisza Collection Found., 596 U.S. 107, 116 (2022) (concluding that, when an exception to foreign sovereign immunity applies under the Foreign Sovereign Immunities Act, federal courts must apply Klaxon because the statute already protects the unique federal interest of foreign relations). Instead, “the issue of whether to displace state law . . . is primarily a decision for Congress,” Miree v. DeKalb Cnty., 433 U.S. 25, 32 (1977), and “[w]e should not assume that Congress intended to set the courts completely adrift from state law with regard to questions for which it has not provided a specific and definite answer in an act . . . so intimately related to state law,” Richards v. United States, 369 U.S. 1, 11 (1962). In these circumstances, with a “federal statutory regulation [so] comprehensive and detailed,” the usual rule applies that “matters left unaddressed in such a scheme are presumably left subject to the disposition provided by state law,” negating the need to “adopt a court-made rule to supplement” the Code. O‘Melveny & Myers v. FDIC, 512 U.S. 79, 85 (1994).
Accordingly, there is no need to craft a choice-of-law rule unique to bankruptcy to preserve some “undefined federal interests” that do not appear in the Code.6 CoreCivic, Inc. v. Governor of N.J., No. 23-2598, 2025 WL 2046488, at *10 (3d Cir. July 22, 2025) (Ambro, J., dissenting). Rather, when a provision of the Bankruptcy Code governs, the Supremacy Clause obviates any choice-of-law analysis, for federal law always trumps conflicting state law.
Of course, Erie, and consequently Klaxon, arose in the context of diversity jurisdiction, so the extension of the policies those cases embody to other contexts is not obvious. And that uncertainty has caused some of our sister circuits to either reject Klaxon in bankruptcy cases or hedge on its application. See, e.g., In re Lindsay, 59 F.3d at 948; In re Gaston & Snow, 243 F.3d 599, 601-02 (2d Cir. 2001); In re Merritt Dredging, 839 F.2d 203, 206 (4th Cir. 1988). To be sure, that hesitation is not unfounded. As scholars have noted, “[p]art of the explanation for the departures from Klaxon can be found in Supreme Court dicta” in Vanston Bondholders Protective Committee v. Green, 329 U.S. 156 (1946). Clopton, supra, at 2204; see also Tobias Barrington Wolff, Choice of Law and Jurisdictional Policy in the Federal Courts, 165 U. Pa. L. Rev. 1847, 1875-78 (2017). There, the Supreme Court considered whether, and to what extent, an insolvent debtor must pay interest on delinquent interest payments due under a prepetition bond indenture under Chapter X of the Bankruptcy Act. Vanston, 329 U.S. at 159. In doing so, the Supreme Court admonished:
[O]bligations, such as the one here for interest, often have significant contacts in many states so that the question of which particular state‘s law should measure the obligation seldom lends itself to simple solution. In determining which contact is the most significant in a particular transaction, courts can seldom find a complete solution in the mechanical formulae of the conflicts of law. . . . In determining what claims are allowable and how a debtor‘s assets shall be distributed, a bankruptcy court does not apply the law of the state where it sits.
Id. at 161-62. And it is this language upon which some courts have seized to conclude Klaxon has no application in bankruptcy cases because it is inconsistent with some amorphous federal interest. See, e.g., In re SMEC, Inc., 160 B.R. 86, 91 (M.D. Tenn. 1993); In re McCorhill Publ‘g, Inc., 86 B.R. 783, 792 (Bankr. S.D.N.Y. 1988).
But on closer inspection, Vanston says nothing about what choice-of-law rule a court should employ in bankruptcy cases when non-federal law provides the rule of decision. Rather than rejecting Klaxon‘s application in favor of fashioning a bespoke federal choice-of-law rule for bankruptcy cases, the Supreme Court concluded that the bankruptcy courts “administer and enforce the Bankruptcy Act . . . in accordance with authority granted by Congress to determine how and what claims shall be allowed under equitable principles,” whereas “[w]hen and under what circumstances federal courts will allow interest on claims against debtors’ estates being administered by them has long been decided by federal law.” Vanston, 329 U.S. at 162-63 (emphasis added). Thus, Vanston did not resolve the question of what choice-of-law rule courts employ when non-federal law governs a dispute in a bankruptcy case. Instead, it merely determined that when federal law provides a rule of decision that conflicts with state law, federal law controls—a proposition that flows directly from the Constitution.
In sum, the structure of the Bankruptcy Code, the purposes of our bankruptcy system, and federal courts’ obligation to respect the application of state law under Erie and the Rules of Decision Act all support Klaxon‘s extension to bankruptcy cases.
III. Nothing Requires a Federal Choice-of-Law Rule in Place of Klaxon
Aside from seemingly the Eighth Circuit, no other Court of Appeals has extended Klaxon—without reservation—to the bankruptcy context. The Ninth Circuit, as well as the Second and Fourth Circuits, have also addressed the question, taking different approaches but each evincing an unwarranted suspicion of Klaxon‘s relevance beyond diversity cases. I address each approach in turn.
The Ninth Circuit has long eschewed Klaxon‘s rule in favor of federal choice-of-law rules. In re Lindsay, 59 F.3d 942, 948 (9th Cir. 1995). In doing so, it stated that “the risk of forum shopping which is avoided by applying state law has no application [in bankruptcy cases], because [they] can only be litigated in federal court,” and instead “[t]he value of national uniformity of approach” on this question prevails over a patchwork of state choice-of-law regimes. Id. Thus, “[i]n federal question cases with exclusive jurisdiction in federal court, such as bankruptcy, the court should apply federal,
There are two flaws in this reasoning. First, it confuses the basis for federal jurisdiction with the question of governing law. A “federal jurisdictional grant . . . is not in itself a mandate for applying federal law in all circumstances.” United States v. Little Lake Misere Land Co., 412 U.S. 580, 591 (1973). Instead, as is by now clear, “it is the source of the right sued upon, and not the ground on which federal jurisdiction over the case is founded, which determines the governing law.” Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234 F.2d 538, 540 n.1 (2d Cir. 1956).7 In other words, the observation that federal courts possess exclusive jurisdiction over bankruptcy cases is correct as far as it goes, but it merely identifies a potential choice-of-law question—it does nothing to resolve it. Instead, the existence of federal jurisdiction begets the downstream question of which law governs the dispute and how to decide that question in instances of conflict. That is a question of parties’ rights, not federal courts’ jurisdiction. See Shutts, 472 U.S. at 818. But by reflexively employing a federal common law choice-of-law rule, the Ninth Circuit‘s approach risks altering parties’ rights by selecting different law than would govern outside of bankruptcy.
That points up the second problem with the Ninth Circuit‘s approach. The Lindsay court touts a federal choice-of-law rule as carrying a great deal of “value” without greater explanation, seemingly elevating “national uniformity” for uniformity‘s sake. 59 F.3d at 948. But uniformity at what cost? Even accepting the premise that national uniformity has inherent value,8 the value in uniformity does not outweigh the significant incongruities a bespoke bankruptcy choice-of-law rule portends. A federal choice-of-law rule in bankruptcy cases risks altering parties’ substantive rights. State law governs many issues in bankruptcy cases, but none arises more frequently than property interests. See, e.g., Butner, 440 U.S. at 55. And the fact that a dispute turns up “in the context of a federal bankruptcy” proceeding “doesn‘t change much.” Rodriguez v. FDIC, 589 U.S. 132, 137 (2020). So “[s]ince state, rather than federal, substantive law is at issue there is no need for a uniform federal rule.” Semtek Int‘l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001).
Indeed, as the Fourth Circuit rightly noted, “[i]t would be anomalous to have the same property interest governed by the laws of one state in federal diversity proceedings and by the laws of another state where a federal court is sitting in bankruptcy.” In re Merritt Dredging, 839 F.2d at 206. But that disparity is exactly what the Ninth Circuit‘s approach invites, and it does so with no basis in the Code or the statutes granting federal courts jurisdiction over bankruptcy cases. Parties’ property rights do not depend on the basis for a court‘s jurisdiction.
The approaches of the Second and Fourth Circuits are flawed as a doctrinal matter, though difficult to distinguish from the Eighth Circuit‘s in practice. Those courts have rightly observed that, in the ordinary course, the fact that a choice-of-law question arises in bankruptcy does not provide sufficient reason to depart from Klaxon because state law generally provides the substantive law governing a dispute, so Erie and the Rules of Decision Act control. See In re Gaston & Snow, 243 F.3d at 607; In re Merritt Dredging, 839 F.2d at 206.
They also theorize, however, that there may be exceptional cases when a “compelling federal interest,” In re Merritt Dredging, 839 F.2d at 206, would require the application of a federal common law choice-of-law rule. Thus, they purport to adopt a safety valve by applying Klaxon only “in the absence of a compelling federal interest which dictates otherwise.” Id.; see also In re Gaston & Snow, 243 F.3d at 607 (“We necessarily limit our holding to cases where no significant federal policy, calling for the imposition of a federal conflicts rule, exists.“). In positing that carveout, these courts hypothesize a scenario where some federal interest compels abandonment of Klaxon. Though this rule may appear on its face to conflict with the rule from Klaxon, in practice, it does not. Tellingly, neither court has actually identified—much less confronted—such a situation. And the prospect of them ever doing so seems fanciful because their hypothesis runs headlong into the presumption against, and stringent criteria for, the making of federal common law.
At the outset, it is not clear whether the federal interest the Fourth and Second Circuits hypothesize would need to conflict with a state‘s choice-of-law rule or the substantive law that choice-of-law rule selects. If the former, it is particularly difficult to imagine what federal interest would conflict with the use of a specific choice-of-law rule given the absence of a federal choice-of-law rule provision in the Bankruptcy Code and the Code‘s indifference to the law that determines parties’ rights and interests. See infra pp. 21-23. If it is the latter, then the real problem is not the use of a state‘s choice-of-law rule at all. Rather, as the Eighth Circuit has properly characterized it, the problem is the incompatibility between the non-bankruptcy law chosen to govern a dispute and the federal interest, because permitting a state law to “trump” the federal interest expressed in the Bankruptcy Code “would effectively convert the [] choice of law [question] to an ‘anti-preemption’ [question].” In re Schriock Constr., 104 F.3d at 202. In short, the resolution to that conflict is application of a federal rule of decision and its priority over state law pursuant to the Supremacy Clause, not abandonment of Klaxon.
Even moving past this ambiguity, embracing the alternative to Klaxon—a federal choice-of-law rule—must “begin[] with the recognition that federal choice of
In order to justify the Second and Fourth Circuits’ approach that departs from Klaxon, yet requires a choice-of-law analysis—i.e., employing a federal common law choice-of-law rule—two conditions must be true: (1) there must be a sufficiently weighty federal interest in conflict with otherwise governing non-federal law to warrant fashioning a federal rule of decision to resolve conflicts among non-bankruptcy law, but (2) that interest must not be sufficiently weighty to justify fashioning a federal common law rule of decision. The former must be true to justify the “[j]udicial lawmaking” involved in crafting federal common law rules—lawmaking that “plays a necessarily modest role under a Constitution that vests the federal government‘s ‘legislative Powers’ in Congress.” Id. at 136 (quoting
Yet a review of the Bankruptcy Code and its policies establishes neither condition. The Code is agnostic about which body of non-bankruptcy law governs parties’ rights—it simply “takes the [interest] as it finds it.” Bartenwerfer v. Buckley, 598 U.S. 69, 82 (2023). That is to say, the Bankruptcy Code embodies no federal interest that favors the application of any particular non-bankruptcy law over another. And this makes good sense. It is “the basic federal rule” that “entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the . . . obligation.” Raleigh v. Ill. Dep‘t of Revenue, 530 U.S. 15, 20 (2000). Sometimes, federal non-bankruptcy law will control that issue. See, e.g., Bd. of Trs. of Teamsters Loc. 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 168 (3d Cir. 2002). Other times, it may be state or foreign law that does. Either way, the Bankruptcy Code directs courts to consider parties’ interest under whichever law governs outside of bankruptcy, and it then establishes a collection of rules to deal with those interests.
The Supreme Court‘s decision in Butner is not to the contrary. There, the Court famously held that “[p]roperty interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently
Butner addressed whether “the right to the rents collected during the period between [a] mortgagor‘s bankruptcy and the foreclosure sale of the mortgaged property . . . is determined by a federal rule of equity or by the law of the State where the property is located.” Id. at 49. In other words, the Supreme Court considered which body of law—state or federal—supplies the rule of decision for allocation of rents. It concluded, as a general matter, “[p]roperty interests are created and defined by state law.” Id. at 55. But it also recognized that, while uncommon, federal law can sometimes define parties’ property interests, especially where the United States is a party.9 See, e.g., Clearfield Tr. Co. v. United States, 318 U.S. 363, 366 (1943). For this reason, the Court acknowledged that where federal law does govern property rights, that law controls. But Butner cannot reasonably be read to suggest that federal law provides the choice-of-law rule to decide among conflicting non-federal laws when it is those laws that provide the rule of decision. That is because Butner posits a scenario in which state property law is displaced due to “some federal interest [that] requires a different result,” 440 U.S. at 55, not that this federal interest favors one state law over others. See Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 451 (2007) (juxtaposing Butner and Vanston to illustrate this point). Put another way, reading Butner to license creation of a federal common law choice-of-law rule renders the proviso meaningless because, read in such a way, state law still governs the substantive property interest while federal law simply chooses among conflicting state laws. That plainly is not the dichotomy Butner envisioned. Instead, Butner stands for the far more straightforward proposition that state law generally governs parties’ property interests except in the unusual case where federal law provides the rule of decision. It offers no insight, however, into how to choose among conflicting laws when non-federal law governs.10
This result does not derogate those federal interests that do exist. To be sure, there are many areas of law in which
But again, in these instances—and all others where federal law supplies the rule of decision—there is no choice-of-law question, making Klaxon inapplicable. That is because the Constitution resolves vertical choice-of-law questions in absolute terms: “[I]f a state measure conflicts with a federal requirement, the state provision must give way.” Swift & Co. v. Wickham, 382 U.S. 111, 120 (1965). In all other cases, non-federal law enjoys the usual presumption against “displacement.” Boyle v. United Techs. Corp., 487 U.S. 500, 507 (1988). So it is only in the absence of a federal rule of decision—that is, in the absence of a federal interest warranting displacement of non-federal law—that a choice-of-law question arises. And at that juncture, the Bankruptcy Code is agnostic about which law governs, leaving “no reason [for] such interests [to] be analyzed differently” than if they had arisen outside of bankruptcy. Butner, 440 U.S. at 55.
*
The daylight between these positions—especially between those of the Eighth Circuit and the Second and Fourth Circuits—can be elusive, and the debate can easily be labeled esoteric. Relative to the number of questions governed by state law that arise in bankruptcies across the country, those that present genuine choice-of-law questions are admittedly few. And those whose outcome would change depending on the application of Klaxon versus a federal choice-of-law rule are likely fewer still. But apart from doctrinal clarity, which carries its own virtue, resolution of this question in the manner I have proposed serves two important purposes.
First, federal courts exercise limited powers. Perhaps nowhere is that power more at its nadir than in the area of fashioning federal common law. As the Supreme Court has admonished since Erie, those contexts that necessitate a federal common law rule are fleeting, and the criteria for recognizing such a rule are exacting. It is incumbent on us to candidly recognize the limits of our authority as a function of the Constitution‘s separation of powers. After all, “[t]he Framers ‘built into the tripartite Federal Government . . . a self-executing safeguard against the encroachment
U.S. at 136, does much to guard against encroachment upon Congress‘s authority to legislate on the subject of bankruptcies.
Second, with doctrinal clarity and the acknowledgment of federal courts’ limited authority comes clearer notice to litigants as to what rule they can expect to govern their rights. As discussed, the Ninth Circuit‘s departure from Klaxon is misguided. As for the Second, Fourth, and Eighth Circuits, their approaches in practice always have, and always will, lead to the same result—Klaxon applies in bankruptcy, but federal law necessarily provides the rule of decision “when some federal interest requires a different result.” In re Schriock Constr., 104 F.3d at 202. But by framing the question as choice-of-law instead of rule-of-decision and leaving the door open for a different choice-of-law rule in theory, the Second and Fourth Circuits invite needless litigation over Klaxon‘s applicability and leave lingering uncertainty about which law will govern parties’ disputes. They hypothesize a category of cases that, in reality, is a null set. No federal interest exists that will displace a state‘s choice-of-law rule without simultaneously requiring displacement of state substantive law in favor of a federal rule of decision. Instead of perpetuating the uncertainty surrounding the choice-of-law rule that governs in bankruptcy, we should recognize what practice teaches and give courts and litigants alike notice of the governing framework: The rule from Klaxon extends to bankruptcy cases.11
IV. Idiosyncratic State Choice-of-Law Rules Do Not License Abandoning Klaxon
For their part, among the options in this three-way circuit split, the parties urge us to adopt the Second and Fourth Circuits’ hybrid approach to Klaxon, cautioning that we “should not adopt a rule that would require bankruptcy courts to follow idiosyncratic state choice-of-law rules even when doing so would create conflicts, encourage forum-shopping, or undermine significant federal interests.” Appellees’ Second Supp. Br. 11; see also Appellants’ Second Supp. Br. 4. And to illustrate their point, Appellees pose the example of “a hypothetical forum state . . . reject[ing] the internal-affairs doctrine [to] allow its own idiosyncratic rules to dictate who speaks for a foreign corporation.” Appellees’ Second Supp. Br. 10. They insist that in such a scenario, “the federal interest in preserving the internal-affairs doctrine and orderly bankruptcy filings would warrant a federal choice-of-law rule vindicating the internal affairs doctrine.”12 Id. at 11.
First, and most intuitively for choice-of-law purposes, is the Supremacy Clause.
Thus, when state courts consider which law governs a dispute, the existence of a controlling federal rule resolves any choice-of-law question, “[f]or the policy of the federal [law] is the prevailing policy in every state.” Testa v. Katt, 330 U.S. 386, 393 (1947). In this way, the Supremacy Clause protects the federal authority to enact federal rules of decision to control in circumstances “necessary to protect uniquely federal interests.” Rodriguez, 589 U.S. at 136 (quoting Radcliff Materials, 451 U.S. at 640).
Often, those federal interests will be embodied in a federal statute. But in few, yet important, contexts, federal courts have recognized the need to fashion “federal common law—substantive rules of decision not expressly authorized by either the Constitution or any Act of Congress—that supplant state law,” 19 Wright & Miller‘s Federal Practice & Procedure § 4514 (3d ed. May 2025 update), often when the controversy‘s subject matter closely relates to the federal government or falls within an area of exclusive federal competence, see, e.g., Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 23 (2004) (admiralty); Boyle, 487 U.S. at 505-06 (civil liabilities of contractors under federal procurement contracts); Clearfield Tr., 318 U.S. at 366 (rights and duties of the United States under federally issued commercial paper); Hinderlider v. La Plata River & Cherry Creek Ditch Co., 304 U.S. 92, 110 (1938) (apportionment of water rights between states).
To be sure, federal courts’ common law-making authority “plays a necessarily modest role,” and the Supreme Court has “underscore[d] the care federal courts should exercise before taking up an invitation to try their hand at common lawmaking.” Rodriguez, 589 U.S. at 136, 138. But in the narrow circumstances
Second, the Full Faith and Credit Clause occupies a modest, but important, position among the constitutional provisions bearing on choice of law. In relevant part, it provides that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.”
In modern jurisprudence, much of the Full Faith and Credit Clause‘s function—and that of the statute with which it shares a name,
Apart from its other commands, the Full Faith and Credit Clause, at a minimum, requires that a forum state confronting a horizontal choice-of-law question have “some rational basis” for applying its law over that of a sister state. Id. at 547-48. That basis must be above and beyond mere favoritism toward forum law, for a state does not have a legitimate interest in discriminating against another state‘s law simply by virtue of its foreign origin. See First Nat‘l Bank of Chi. v. United Air Lines, Inc., 342 U.S. 396, 398 (1952); Hughes v. Fetter, 341 U.S. 609, 613 (1951); cf. Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 878 (1985) (holding that a state does not have a legitimate interest purely in favoring domestic economic interests over foreign ones).
Of course, the Full Faith and Credit Clause “does not require one state to substitute for its own statute, applicable to persons and events within it, the conflicting statute of another state, even though that statute is of controlling force in the courts of the state of its enactment with respect to the same persons and events.” Pac. Emps. Ins. Co. v. Indus. Accident Comm‘n of Cal., 306 U.S. 493, 502 (1939). And no doubt, in many cases, forum states will have rational, nondiscriminatory reasons for applying their law over that of others. See, e.g., Cardillo v. Liberty Mut. Ins. Co., 330 U.S. 469, 476 (1947). But the Full Faith and Credit Clause does “set[] certain minimum requirements which each state must observe when asked to apply the law of a sister state,” Wells v. Simonds Abrasive Co., 345 U.S. 514, 516 (1953), and it “requires that a state base its assertion of legislative jurisdiction on a claim that its interests are superior,” not simply that conflicting law is foreign, Kermit Roosevelt III, The Myth of Choice of Law: Rethinking Conflicts, 97 Mich. L. Rev. 2448, 2505 n.240 (1999). This constitutional floor provides yet another constraint on state choice-of-law regimes.
Third, the Privileges and Immunities Clause protects out-of-staters from discrimination on the basis of their foreign citizenship.14 See Supreme Ct. of N.H. v. Piper, 470 U.S. 274, 285 (1985); see also Tyler Pipe Indus., Inc. v. Wash. State Dep‘t of Revenue, 483 U.S. 232, 265 (1987) (Scalia, J., concurring in part and dissenting in part) (grounding the protection “against rank discrimination against citizens of other States” in the Privileges and Immunities Clause). In full, it provides that “[t]he Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.”
The Clause does not guarantee that citizens of each state are entitled to all of the same rights and benefits of citizens in other states, see Piper, 470 U.S. at 284, but only those that are “fundamental” to “the vitality of the Nation as a single entity,” Baldwin v. Fish & Game Comm‘n of Mont., 436 U.S. 371, 382-83 (1978) (quotation omitted). It does, however, “bar discrimination against citizens of other States where there is no substantial reason for the discrimination beyond the mere fact that they are citizens of other States.” Toomer, 334 U.S. at 396.
The
Fourth, and finally, the Due Process Clause of the Fourteenth Amendment substantively limits to which disputes states may extend their law.15 In providing that “[n]o State shall . . . deprive any person of life, liberty, or property, without due process of law,”
protects litigants against “unfair surprise or frustration of legitimate expectations” of the law governing their dealings.16 Allstate, 449 U.S. at 318 n.24.
Where states do not transcend constitutional barriers, Klaxon‘s rule best serves the purposes of the Bankruptcy Code consistent with Erie, the Rules of Decision Act, and the presumption against federal common law-making. So just as Klaxon and Erie aim to preserve the substantive law governing a dispute notwithstanding the “accident of diversity,”17 Klaxon, 313 U.S. at 496 (citing Erie, 304 U.S. at 74-77), extending Klaxon in this manner avoids altering the substantive law governing a dispute simply because of the “happenstance of bankruptcy,” Lewis v. Mfrs. Nat‘l Bank of Detroit, 364 U.S. 603, 609 (1961).
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The question of Klaxon‘s applicability to bankruptcy has persisted for nearly 80 years. This case, just as with others our Court has encountered, permits us to elide the question of which choice-of-law methodology to employ. But we have the responsibility not to perpetuate this uncertainty. I hope that, in the appropriate case, we will resolve this question and give guidance to bankruptcy and district courts in our Circuit in a way that is consistent with the Bankruptcy Code, Erie and the Rules of Decision Act, and the policies underlying the grant of bankruptcy jurisdiction to federal courts.
The Erie doctrine—taken from Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), and its progeny—is the North Star for determining whether federal or state law should apply in federal court. The answer is state law unless the matter is governed by superseding federal law, such as the Constitution, a congressional enactment, or federal common law. See Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, 19 Federal Practice and Procedure § 4501 (3d ed. 2025). Erie questions occur most often when federal courts sit in diversity-of-citizenship jurisdiction because those disputes usually involve only state substantive law. State law, however, includes more than just the underlying substantive law. The Supreme Court told us in Klaxon v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941), that it includes choice-of-law rules as well.
What force, if any, does Klaxon have in bankruptcy, where the parties’ primary rights and interests are often governed by state law? We need not answer that question in a holding, as the parties agree on the law that governs: New Jersey‘s. See Wright, Miller & Cooper § 4506 (collecting cases for the proposition that courts need not determine which state‘s choice-of-law regime applies when the parties do not dispute that question).
Though “a pretty good reason for having ‘skimmed over the conflicts problem as if none existed’ was that none did exist,” Henry Friendly, In Praise of Erie—And the New Federal Common Law, 39 N.Y.U. L. REV. 383, 401 (1964) (citation omitted), the question whether Klaxon applies in bankruptcy has spawned interesting academic debate. Answers span the spectrum. Compare, e.g., Zachary D. Clopton, Horizontal Choice of Law in Federal Court, 169 PA. L. REV. 2193, 2203-06 (2021) (Klaxon applies without exception), with Tobias Barrington Wolff, Choice of Law and Jurisdictional Policy in the Federal Courts, 165 PA. L. REV. 1847 (2017) (Klaxon applies only in diversity actions). Our concurring colleague has staked out her position that Klaxon always applies in bankruptcy, no exceptions. Because I am uncomfortable with that view, I instead take the opportunity to make some nonbinding observations about Erie and choice of law.
I. ERIE AND KLAXON
A brief refresher on the Erie doctrine. Despite the almost mystical fascination that has long surrounded Erie, it stands for three basic propositions.
First, “[t]here is no federal general common law.” Erie, 304 U.S. at 78 (emphasis added). “[N]either Congress nor the federal courts can, under the guise of formulating rules of decision for federal courts, fashion rules which are not supported by a grant of federal authority contained in Article I or some other section of the Constitution.” Hanna v. Plumer, 380 U.S. 460, 471 (1965). When the Constitution does authorize Congress or courts to do so, however, Erie has no application, and federal law displaces contrary state law through the Supremacy Clause.
Second, without a federal statute or constitutionally authorized federal common-law rule, the Rules of Decision Act,
Third, when a Federal Rule (e.g., the Federal Rules of Civil Procedure) conflicts with state law, then the Rules Enabling Act,
Klaxon followed Erie and held that a federal court sitting in general diversity-of-citizenship jurisdiction is required to use the choice-of-law rules of its forum state. Klaxon, 313 U.S. at 496-97. The Court‘s reasoning was sparse, but its decision is best understood as falling into the Erie doctrine‘s second bucket—absent some constitutionally authorized federal law, the Rules of Decision Act kicks in. State choice-of-law rules are state rules of decision under that statute. See A.I. Trade Fin., Inc. v. Petra Int‘l Banking Corp., 62 F.3d 1454, 1464 (D.C. Cir. 1995) (“A choice-of-law rule is no less a rule of state law than any other . . . .“). But if Congress or federal courts invoke some source of constitutional authority to promulgate federal choice-of-law rules, then federal courts would instead find themselves in the first bucket. The Rules of Decision Act, and thus Klaxon, would no longer apply.
II. FEDERAL COMMON LAW AFTER ERIE
Although Erie ended the general federal common law, the Supreme Court has been unequivocal in recognizing that the Erie doctrine does not entirely displace federal common law. As Justice Brandeis acknowledged in a decision released on the same day as Erie, federal courts may still formulate special federal common law on issues of uniquely federal interest. See Hinderlider v. La Plata River & Cherry Creek Ditch Co., 304 U.S. 92, 110 (1938) (concluding that interstate water apportionment “is a question of ‘federal common law’ upon which neither the statutes nor the decisions of either State can be conclusive“); see also Boyle v. United Techs. Corp., 487 U.S. 500, 504 (1988) (noting that federal courts may still formulate federal common law in certain areas implicating “uniquely federal interests“).
For example, federal courts may still generate common-law rules when “the policy of the law is so dominated by the sweep of federal statutes and doctrines developed under them that the legal relations they affect must be deemed governed by federal law.” Wright, Miller, & Cooper § 4514. Likewise, it can sometimes “be inferred from congressional or constitutional intent that the federal courts should supply the necessary rule of decision by pronouncing common law to fill the interstices of a pervasively federal substantive framework.” Id.
To be sure, the “cases in which judicial creation of a special federal rule would be justified . . . are ‘few and restricted.‘” O‘Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994) (quoting Wheeldin v. Wheeler, 373 U.S. 647, 651 (1963)). Before federal courts develop common-law rules, “a significant conflict between some federal policy or interest and the use of state law must first be specifically shown.” Atherton v. FDIC, 519 U.S. 213, 218 (1997) (quoting Wallis v. Pan Am. Petrol., 384 U.S. 63, 68 (1966)). But when that happens, federal courts no doubt have the power to create special federal common law, including choice-of-law rules.
III. WHAT CHOICE-OF-LAW RULES GOVERN WHEN FEDERAL COURTS SIT IN BANKRUPTCY?
This leaves our main questions: (1) Does Klaxon apply in federal bankruptcy litigation, and if so, (2) may federal courts ever use special federal common-law choice-of-law rules instead?
The circuits are split. The Ninth Circuit limits Klaxon to diversity cases, and thus federal courts must apply federal choice-of-law principles in bankruptcy cases. In re Lindsay, 59 F.3d 942, 948 (9th Cir. 1995).1 The Eighth Circuit has arguably held that Klaxon applies categorically in federal bankruptcy cases without exception. In re Payless Cashways, 203 F.3d 1081, 1084 (8th Cir. 2000). I say “arguably” because that decision passes on the issue in a single conclusory sentence with no further analysis. It is thus hard to conclude that the Eighth Circuit contemplated and rejected the possibility of exceptions. Finally, the Second and Fourth Circuits have held that Klaxon applies in federal bankruptcy proceedings unless a strong federal interest justifies creating federal choice-of-law rules as a matter of federal common law. In re Merritt Dredging Co., 839 F.2d 203, 206 (4th Cir. 1988); In re Gaston & Snow, 243 F.3d 599, 605-06 (2d Cir. 2001).
I believe that the Second and Fourth Circuits have it right. The Ninth Circuit is wrong because Erie, and thus Klaxon, is not limited to federal diversity jurisdiction. Whenever federal courts encounter an issue whose resolution is not a matter of federal law, the Rules of Decision Act compels them to use state substantive law, which includes choice-of-law rules. If the Eighth Circuit held that Klaxon applies without exception in federal bankruptcy cases, it is wrong as well. Federal courts after Erie retain constitutional power to promulgate special federal common-law rules, including choice-of-law rules, when strong federal interests justify doing so. ”Erie did not fence off a ‘local law field’ constitutionally immune to federal influence; it was quite clear that exclusive state power takes up only where federal power leaves off.” John Hart Ely, The Irrepressible Myth of Erie, 87 HARVARD L. REV. 693, 705 (1974).
A. Erie and Klaxon Apply Outside General Diversity Jurisdiction.
I believe it is wrong to conclude that Erie applies only in federal diversity cases. It applies to any “questions which arise in federal court but whose determination is not a matter of federal law.” Merritt Dredging, 839 F.2d at 206; see also Fagin v. Gilmartin, 432 F.3d 276, 285 n.2 (3d Cir. 2005) (Ambro, J.) (invoking Erie to apply
If we accept that Erie applies whatever the basis of federal jurisdiction, then it does not take much more analysis to conclude that the same is true for Klaxon. Both Erie and Klaxon “make clear that federal law may not be applied to questions which arise in federal court but whose determination is not a matter of federal law.” Merritt Dredging, 839 F.2d at 206. That includes in bankruptcy. As the Fourth Circuit explained, “[i]t would be anomalous to have the same property interest governed by the laws of one state in federal diversity proceedings and by the laws of another state where a federal court is sitting in bankruptcy.” Id.
B. Federal Courts May Still Apply Federal Common-Law Choice-of-Law Rules in Bankruptcy Cases When Strong Federal Interests Warrant Doing So.
Klaxon applies in bankruptcy proceedings when addressing state-law questions; that much we agree on. The sole remaining wrinkle is whether federal courts sitting in bankruptcy must always apply the forum state‘s choice-of-law rules when the underlying issue is governed by state law. That is where I part with our concurring colleague. In Judge Krause‘s view, federal courts sitting in bankruptcy jurisdiction can never create federal common-law choice-of-law rules for some combination of five reasons.3
First, the Bankruptcy Code generally absorbs state laws to define the parties’ property interests, and so it follows that state choice-of-law rules must also apply. Conc. Op. 4-6. Second, the Bankruptcy Code is intended to facilitate the orderly resolution of competing creditors’ claims without significantly affecting their underlying entitlements, and federal choice-of-law rules, if allowed, could change the outcome. Id. at 6-9. Third, federal courts have limited power to make federal common law. Id. at 19-20. Fourth, if there were some reason to create a federal
None of the first four arguments supports the claim that federal courts can never create choice-of-law rules in bankruptcy—they support only the lesser claim that state choice-of-law rules will almost always apply. As noted, I agree with that conclusion. My colleague‘s fifth argument, however, is where we part, as the Supreme Court has recognized that even when bankruptcy otherwise looks to state law, sufficiently strong federal interests may warrant creating special federal common law.
1. Bankruptcy typically absorbs state law.
Our concurring colleagues observes, rightly, that federal courts sitting in bankruptcy “regularly look to governing non-bankruptcy law—often ‘state law‘—to determine parties’ ‘rights and obligations when the Code does not supply a federal rule.‘” Conc. Op. 4 (citation omitted). If federal courts in bankruptcy used special federal choice-of-law rules that differed from those of the forum state, then the parties’ choice of forum (or even the basis of federal jurisdiction) could change their primary rights.
This is true, but it does not establish more than we already know—Klaxon should ordinarily apply in bankruptcy. That federal courts confronted with state-law questions should use state choice-of-law rules to avoid jurisdiction-shopping is not an interest unique to bankruptcy. Yet even federal courts sitting in diversity jurisdiction may theoretically formulate special federal common law to protect important federal interests. See, e.g., Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964) (applying act-of-state doctrine in diversity case). And when courts do so, neither Erie nor Klaxon prevents them from using those rules instead of state law.
At most, that bankruptcy ordinarily absorbs state substantive law supports a background presumption that federal courts in bankruptcy will rarely have a good reason to create federal choice-of-law rules. It does not support the broader argument that federal courts can never create special choice-of-law rules in bankruptcy.
2. Bankruptcy should rarely alter the parties’ underlying entitlements.
Our concurring colleague next cites “renowned scholars” endorsing the “‘creditors‘[-]bargain’ theory,” which “conceptualizes bankruptcy‘s primary role as a means to resolve the collective action problem posed by self-interested creditors who, absent a centralized insolvency resolution system, would engage in individual collection actions under applicable non-bankruptcy law.” Conc. Op. 6. On this view, bankruptcy ordinarily should not alter the parties’ underlying entitlements.
I take no position on whether the creditors‘-bargain theory is the best interpretation of the Bankruptcy Code as a whole. But even if it were, it would not provide an argument in support of the claim that federal courts sitting in bankruptcy lack the power to create federal choice-of-law rules. As above, this argument at most suggests that the circumstances are rare under which federal courts could justifiably create federal common law that affects the
3. Federal common law is rare.
Judge Krause next observes, again correctly, that “the creation of federal common law is appropriate only in ‘situations where there is a significant conflict between some federal policy or interest and the use of state law.‘” Conc. Op. 20 (quoting O‘Melveny, 512 U.S. at 87). “[S]uch a conflict [is] a precondition for’ federal common law-making.” Id.
Once again, the premise is true, but it does not support the conclusion. If anything, Judge Krause acknowledges that federal courts can create federal common-law rules when there is a sufficiently strong federal interest threatened by state law. As with her argument that bankruptcy should rarely change the parties’ underlying rights and interests, this argument mistakes rareness for impossibility. For common lawmaking to be rare, rather than impossible, courts must be able to do it in at least some cases.
Judge Krause also appeals at times to separation-of-powers principles and cautions against leaving courts “to divine untold rules from some brooding cloud of federal interests.” Conc. Op. 10. But this misses the point. No one has suggested that federal courts can or should exercise freewheeling lawmaking power or identify federal interests without congressional guidance. See generally CoreCivic, Inc. v. Governor of N.J., 2025 WL 2046488 (3d Cir. July 22, 2025) (Ambro, J., dissenting) (rejecting that view). But Congress may express federal interests through statute—for example, the Bankruptcy Code—and courts may, in rare circumstances, create federal common law to give effect to those congressionally endorsed interests, particularly when applying state law would undermine Congress‘s objectives.
4. Federal courts should create substantive rules of decision instead of choice-of-law rules.
Next, Judge Krause claims that it is hard to imagine a case involving a federal interest strong enough to justify federal common law, but not strong enough to justify a substantive rule of decision rather than a choice-of-law rule. In her view, “for the Second and Fourth Circuits’ approach to be correct, . . . a federal interest has to fall into the goldilocks zone.” Conc. Op. 20-21. Maybe so, but it will not surprise the reader to hear that this also is not an argument against the power of federal courts to create federal choice-of-law rules in bankruptcy. It is an argument for the claim that the circumstances when courts would need to do so are “few and restricted.” O‘Melveny, 512 U.S. at 87 (quoting Wheeldin, 373 U.S. at 651). Judicial humility cautions against making the sweeping claim, in the absence of a case or controversy before us, that no such interest can exist just because one has not presented itself.
5. The Bankruptcy Code contains all relevant federal interests, and a choice-of-law rule is not among them.
The only argument my colleague makes that theoretically supports her claim that federal courts can never develop choice-of-law rules in bankruptcy is that the Bankruptcy Code is a comprehensive and reticulated statutory regime whose text exhausts
That premise is faulty because it would apply with equal strength to the power of federal courts to create substantive common-law rules in bankruptcy. Yet the Supreme Court has rejected that argument: “Property interests are created and defined by state law . . . [u]nless some federal interest requires a different result.” Butner v. United States, 440 U.S. 48, 55 (1979) (emphasis added). If the Supreme Court has recognized that strong federal interests can sometimes allow federal courts to devise special rules of decision governing the parties’ underlying property interests, I do not know why those interests could not also justify special choice-of-law rules.
Judge Krause claims that Butner stands only for the limited proposition that a strong federal interest can justify a federal substantive rule, “not that this federal interest [could] favor[] one state law over others.” Conc. Op. 22. But Butner does not turn on the difference between substantive law and choice-of-law rules. It supports the broader principle that the selection of state rules of decision in bankruptcy must yield to overriding federal interests. On Judge Krause‘s view, a sufficiently strong federal interest could warrant a federal substantive rule, but never a choice-of-law rule. The unstated assumption seems to be that there could not be a strong federal interest that would justify a federal choice-of-law rule that ultimately selects state substantive law instead of a federal substantive rule. But that assumption is also faulty. Federal courts can and do develop federal rules that select state substantive law. See, e.g., Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) (formulating federal common-law rule for demand futility in federal derivative actions that incorporates the corporate law of the state of incorporation); Semtek Int‘l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001) (formulating federal common-law rule for preclusion in general diversity actions and “adopting, as the federally prescribed rule of decision, the law that would be applied by state courts in the State in which the federal diversity court sits“).
Judge Krause insists that cases like Kamen and Semtek are distinguishable because they involved “federal common law rules of decision—not choice-of-law rules—that incorporate the contents of state law.” Conc. Op. 23 n.10. But it is unclear how that distinction defends her central claim, which I understood to be that any federal interest strong enough to authorize federal common law can justify nothing less than a uniform substantive rule. If federal courts can sometimes formulate a rule of decision whose content absorbs the law of the defendant‘s state of incorporation, then I do not understand why, at least in theory, they could not also formulate a choice-of-law rule that selects the law of the defendant‘s state of incorporation.
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It is worth stepping back to get a clear view of my concurring colleague‘s argument. As I understand her, she does not believe Erie‘s constitutional rule prohibits federal courts from developing special federal common law when the Constitution or federal statute authorizes them to do so. Nor does she believe that federal courts properly exercising their limited common-lawmaking authority lack the power to create a rule of decision that always incorporates the contents of state substantive law. At its core, her argument is merely that she cannot imagine a case in which a federal
IV. CONCLUSION
We should not succumb to the “beguiling tendency” to make “[c]onflict-of-law problems . . . more complicated than they are.” Vanston, 329 U.S. at 169 (Frankfurter, J., concurring). If Klaxon‘s application in bankruptcy becomes an issue, then I would endorse the sensible, never-say-never approach of the Second and Fourth Circuits: Absent an “overwhelming federal policy [that] requires us to formulate a choice of law rule as a matter of independent federal judgment, we adopt the choice of law rule of the forum state.” Merritt Dredging, 839 F.2d at 206; see also Gaston, 243 F.3d at 607 (“We necessarily limit our holding to cases where no significant federal policy, calling for the imposition of a federal conflicts rule, exists.“).