Once property is abandoned, the federal court lacks jurisdiction under 28 U.S.C. §§ 1334(e)(1) and 1334(b) when there is no effect on the estate, according to an August 21 opinion by Fifth Circuit Judge Carolyn Dineen King.

Owning oceanfront land in Galveston, Texas, the individual debtor filed a chapter 11 petition, but the case was converted to chapter 7. Unable to sell the property, the trustee abandoned the land.

One year after abandonment, the debtor sued the City of Galveston and other governmental entities in bankruptcy court. The complaint alleged uncompensated takings of property in violation of the Fifth Amendment that allegedly prevented the debtor from developing or selling the property.

The defendants filed motions to dismiss. Sua sponte, the bankruptcy court transferred the adversary proceeding to district court. While the motions were pending, the bankruptcy case was closed when administration had been completed.

The district court granted the motions to dismiss, finding neither federal question jurisdiction nor bankruptcy jurisdiction under 28 U.S.C. §§ 1334(e)(1) and 1334(b). The former debtor appealed to the Fifth Circuit and won a qualified victory.

Section 1334(e)(1) Jurisdiction

The debtor contended there was jurisdiction under Section 1334(e)(1), which confers “exclusive jurisdiction” over “all property, wherever located, of the debtor as of the commencement of the case, and of property of the estate.”

“Contrary” to the debtor’s understanding of the statute, Judge King said that courts “addressing” Section 1334(e)(1) have “consistently held” that “in rem jurisdiction cannot be exerted over abandoned property.” For the proposition, she cited the Sixth Circuit Bankruptcy Appellate Panel along with bankruptcy courts in Georgia, Mississippi, Alabama and Washington, D.C.

While those decisions were “not binding,” Judge King said, they “do indicate a consensus among the federal courts on the issue.” She cited the Collier treatise for saying that jurisdiction “usually” ends with abandonment.

Judge King explained that the “function” of Section 1334(e)(1) is to facilitate administration of estate property and not to give the bankruptcy court jurisdiction “over the debtor’s property in perpetuity.”

Judge King discussed three bankruptcy court decisions that found Section 1334(e)(1) jurisdiction over abandoned property but said that she was “not convinced that the courts correctly exercised jurisdiction pursuant to this provision.” Because all three of the cases entailed facts indicating some effect on the estate, she said it would have been “more appropriate” to find jurisdiction under Section 1334(b).

Section 1334(b) Jurisdiction

Finding no “limited, exclusive jurisdiction” under Section 1334(e)(1), Judge King turned to Section 1334(b), which confers “original but not exclusive jurisdiction of all civil proceedings . . . arising in or related to cases under title 11.”

Judge King said that Section 1334(b) jurisdiction is “broad” but “not limitless.” She said there will be no jurisdiction “when the claims at issue affect only the debtor, not the bankruptcy estate.” To establish jurisdiction under Section 1334(b), she said that the debtor “must establish” that the lawsuit “could have a conceivable effect on the bankruptcy estate at the time she filed her complaint.”

The property was not part of the bankruptcy estate when the debtor filed her complaint, and secured creditors would be recovering from neither the debtor nor the property, Judge King said. The judge identified two reasons why the lawsuit “could not have affected her bankruptcy estate at the time of filing.”

Citing the Collier and Norton treatises, Judge King said that abandoned property is treated as if no bankruptcy had been filed and that abandonment “usually” ends jurisdiction to decide disputes regarding the property.

Because the debtor had not “clearly identified how her claims, which concern an abandoned property, could impact the bankruptcy estate,” Judge King found no error in the district court’s conclusion that there was no federal jurisdiction under Section 1334(b).

For reasons of little significance to bankruptcy nerds, Judge King reversed the district court by concluding that there was federal question jurisdiction under 42 U.S.C. § 1983 in view of constitutional claims in the complaint.