Bankruptcy courts have “arising in,” “arising under” and “related to” jurisdiction to enforce a guarantee issued by a nondebtor promising to pay the debtor’s attorneys’ allowed compensation.

In his opinion on February 28 for the Ninth Circuit Bankruptcy Appellate Panel, Bankruptcy Judge William J. Lafferty, III also said that 28 U.S.C. § 1334(e)(2) gives the bankruptcy court exclusive jurisdiction with regard to disputes over fee allowances.

The corporate debtor needed to liquidate assets in chapter 11, but all assets were subject to a lien, giving the debtor no capacity to pay compensation for its attorneys. To remedy the problem, an affiliate of the debtor agreed to pay the debtor’s counsel $10,000 a month while in chapter 11.

The affiliate also guaranteed payment of fees granted by the bankruptcy court. The fee arrangements were all disclosed and approved by the bankruptcy court, including the affiliate’s guarantee to pay allowed compensation.                                                                                       

The bankruptcy court eventually sold the debtor’s assets and granted a final allowance of compensation to the debtor’s counsel. The order allowing fees stated that the liability was a joint and several obligation of the debtor and the affiliate.

The affiliate refused to pay the debtor’s counsel’s fees. For three years, counsel chased the affiliate from court to court, even in Canada, where the affiliate had assets. Finally cornered, the affiliate reopened the bankruptcy case and filed a motion under Rule 60(b).

The affiliate wanted the bankruptcy court to alter the fee allowance order by declaring that the bankruptcy court had no subject matter jurisdiction to enforce the guaranty of payment of counsel fees. Bankruptcy Judge Gary Spraker denied the motion.

The affiliate appealed to the BAP but lost every argument. In particular, Judge Lafferty said that “the instant proceeding is so fundamental to the bankruptcy court’s authority over counsel that the court also had ‘arising under’ jurisdiction.”

First, though, Judge Lafferty dealt with “arising in” jurisdiction and noted the affiliate’s agreement that the issue was “core.”

Judge Spraker said that the dispute conferred “arising in” jurisdiction because it arose around the retention and compensation of counsel under Sections 327-331. Said another way, the dispute could not have existed absent the bankruptcy case.

Quoting the Ninth Circuit, Judge Lafferty said there would be “arising under” jurisdiction if the existence of the dispute “‘depends on a substantive provision of bankruptcy law, that is, if it involves a cause of action created or determined by a statutory provision of the Bankruptcy Code.’” Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1131 (9th Cir. 2010).

Judge Lafferty found “arising under” jurisdiction because the affiliate “voluntarily” entered into the guaranty agreement and thereby created a dispute within the court’s core jurisdiction.

In addition, there was “related to” jurisdiction. By refusing to pay counsel, the affiliate’s actions created larger administrative expenses and thus affected the administration of the estate.

Of perhaps greatest significance, Judge Lafferty dealt with 28 U.S.C. § 1334(e). It says that the “district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction — (2) over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section 327.”

Judge Lafferty said that “Congress evidently believed the bankruptcy court’s role under § 327 to be so important that it explicitly conferred” exclusive jurisdiction on bankruptcy courts. He described the section as meaning that “the bankruptcy court, and no other court, . . . has the ability and obligation to parse whether any part of counsel’s employment and compensation is adverse to the bankruptcy estate.” [Emphasis in original.]

Having found subject matter jurisdiction, Judge Lafferty turned to refutation of the affiliate’s other arguments. For example, the affiliate contended that the bankruptcy court had no “power” to compel payment of counsel fees except by the debtor.

Judge Lafferty said that “the bankruptcy court’s ‘power[s]’ are distinct from the question of whether the bankruptcy court had subject matter jurisdiction.” Similarly, he said that the affiliate’s motion to modify the compensation order challenged the bankruptcy court’s subject matter jurisdiction, when the affiliate was contending that there was no personal jurisdiction.

Judge Lafferty said that personal jurisdiction was beyond question because the affiliate had participated actively in the bankruptcy case.

Before upholding the bankruptcy court’s refusal to grant relief from the compensation order, Judge Lafferty agreed with the bankruptcy court in saying that the affiliate had not brought the motion within a “reasonable time,” as required by Rule 60(c)(1).