Do Federal Courts Have Bankruptcy Jurisdiction Over Solvent Debtors? (Bestwall v. Committee)

By: Donald L Swanson

The question addressed by the U.S. Fourth Circuit Court of Appeals in its Bestwell v. Official Committee opinion[fn. 1] is this (emphasis added):

• Do federal courts have subject matter jurisdiction over bankruptcy cases involving solvent debtors?

Its answer is:

• “Yes.”

Some History

I started practicing law in 1980—during the first year of the Bankruptcy Code’s existence.[Fn. 2]

For the next four decades or so, the question of bankruptcy court jurisdiction over “solvent debtors” was never questioned.  That’s because:

• neither “insolvency” nor any other word indicating financial distress is even mentioned in the Bankruptcy Code’s § 109, which is titled “Who may be a debtor”:
  • the only exception is that a municipality must be “insolvent” for Chapter 9 eligibility (see § 109(c)(3)); and
  • the very presence of such element in Chapter 9 suggests its inapplicability-by-absence from the other chapters; and
• the last-and-catchall provision in the Bankruptcy Code’s distribution scheme is “to the debtor” (see § 726(a)(6)):
  • many bankruptcy cases have ended with distributions of money (sometimes lots of it) to the debtor or to the debtor’s ownership class; and
  • the provision for a distribution “to the debtor” is inconsistent with debtor’s insolvency being a requirement for bankruptcy jurisdiction.

Bestwall v. Official Committee

The Fourth Circuit addresses the “solvent debtor” jurisdiction question head-on in its Bestwall v. Official Committee opinion.

What follows are some principles declared by the majority and concurring opinions in that case.

–Some Basics

The Constitution grants Article III judicial power over all cases arising under the laws of the United States.

The Bankruptcy Code is a law of the United States. Bestwall petitioned to reorganize under Chapter 11 of the Bankruptcy Code. And so, Bestwall’s petition is a case arising under the laws of the United States.

–Erroneous Committee Argument

Congressional power to enact bankruptcy laws is limited by what the Constitution grants. The Committee, therefore, contends that:

• the meaning of “bankruptcy” at the founding of the U.S. did not include debtors who are able to pay their debts; and
• so, any law allowing a company that can pay its debts into bankruptcy cannot confer constitutional subject matter jurisdiction.

The Committee’s position errs because:

• bankruptcy court jurisdiction is determined by statute, and 28 U.S.C. § 1334 vests district courts with “original and exclusive jurisdiction of all cases under title 11 . . . or arising in or related to cases under title 11”; and
• “no court has ever adopted the Committee’s view”—there are “simply no cases at any level” that explicitly endorse the proposition that financial distress is required for bankruptcy eligibility.

–Concurring Opinion

The Supreme Court unequivocally explained nearly a century ago:

• the power of Congress under the Bankruptcy Clause “is not to be limited by the English or Colonial law in force when the Constitution was adopted”; and
• “the most satisfactory approach to the problem of interpretation . . . is to examine it in the light of the acts, and the history of the acts, of Congress which have from time to time been passed on the subject.”

Like many other provisions of the Constitution, the nature and extent of the bankruptcy power “can best be fixed by the gradual process of historical and judicial inclusion and exclusion.”

The Committee’s read of the Bankruptcy Clause is not tenable:

• the historical trend of bankruptcy legislation and judicial interpretation “has been uniformly in the direction of progressive liberalization”;
• the subject of bankruptcies “is incapable of final definition” because “(t)he concept changes”;
• the Supreme Court has observed that the Bankruptcy Clause language “did not limit the scope of Congress’ authority” and that the defining feature of “the subject of Bankruptcies” is its breadth;
• even under English bankruptcy laws, “it mattered not whether the defendant was insolvent or otherwise” because involuntary proceedings were common and were initiated by a creditor;
• at the dawn of our nation, the American Colonies, and later the several States, had wildly divergent schemes for discharging debtors and their debts”; and
• our Constitutional Convention adopted the Bankruptcy Clause with very little debate—Roger Sherman of Connecticut alone voted against it, “because he was concerned that it would authorize Congress to impose upon American citizens the ultimate penalty for debt then in effect in England: death.”

“In sum,” the gradual process of historical and judicial inclusion and exclusion “plainly demonstrates that the Bankruptcy Clause was never intended to be restricted to those that are ‘actually bankrupt,’ whatever that undefined term purportedly means.”

–Committee’s Vague View

Further, the Committee fails to advance any concrete theory of the financial standard ostensibly required for debtors to be permitted to initiate a bankruptcy proceeding under the Bankruptcy Clause:

• throughout its briefing, the Committee uses constantly shifting terms to define a debtor who is not “actually bankrupt,” none of which would enable bankruptcy courts to adjudicate such a debtor with any specificity; and
• in the 235 years of judicial precedent since the Founding there should be at least one case supporting the Committee’s vague view—“but there are none.”

Conclusion

It’s refreshing to see an appellate court recognize and reaffirm a longstanding and foundational bankruptcy concept—that bankruptcy jurisdiction even applies to solvent debtors.

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Footnote 1.  The opinion is, Bestwall LLC v. Official Committee of Asbestos Claimants, Case No. 24-1493 (4th Cir.; decided August 1, 2025).

Footnote 2.  The Bankruptcy Code became effective on October 1, 1979.

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