The failure to exhaust administrative remedies in a state agency does not deprive a bankruptcy court of subject matter jurisdiction, according to Bankruptcy Judge Kevin R. Huennekens of Richmond, Va.
Before bankruptcy, Circuit City Stores Inc. posted a letter of credit in California to cover its liabilities in that state as a self-insured provider of workers’ compensation insurance. After bankruptcy, California authorities drew down the letter of credit.
Circuit City’s liquidating chapter 11 plan created a trust to collect estate assets. The trust sued California authorities for recovery of excess letter of credit proceeds. The state insurance fund responded with a motion to dismiss, contending that the failure to exhaust administrative remedies required by state law deprived the bankruptcy court of subject matter jurisdiction.
In his April 26 decision, Judge Huennekens denied the state’s motion to dismiss, saying that “state law cannot divest a federal court” of subject matter jurisdiction. He went on to say that the state “failed to cite any case where a state administrative exhaustion requirement prohibited a bankruptcy court from exercising” subject matter jurisdiction.
Even if the case involved exhaustion of federal administrative remedies, Judge Huennekens said that exhaustion is an affirmative defense, not a deprivation of jurisdiction. Assuming that the trust’s claim was based on nothing more than a chose in action, the judge said there was “arising in” and “related to” bankruptcy jurisdiction.
The opinion suggests that the availability of administrative remedies can be an issue for the bankruptcy court’s discretion in deciding whether to exercise jurisdiction.