Despite retention of jurisdiction provisions in a sale-approval order and a chapter 11 confirmation order, the bankruptcy court lacked jurisdiction over a dispute between third parties involving an asset purchase agreement because there was no “arising in” jurisdiction, the First Circuit held.
In other words, retention of jurisdiction is a necessary but not sufficient condition to exercise jurisdiction, according to the June 2 opinion by Circuit Judge Kermit V. Lipez. Retired Supreme Court Justice David H. Souter was on the unanimous panel.
The corporate debtor sold its hospital pursuant to a sale-approval order shortly after filing a chapter 11 petition. The contract obligated the buyer to pay severance to employees it did not retain. The sale-approval order contained a provision providing for the bankruptcy court to retain jurisdiction over any disputes arising under or related to the sale contract. The plan and confirmation order provided for the retention of jurisdiction to enforce orders providing for the sale of property.
Immediately after closing, the buyer fired two senior executives and refused to pay severance. The executives sued, and the bankruptcy court awarded them severance. The bankruptcy court found jurisdiction based on the retention of jurisdiction provisions.
The district court reversed, finding no subject matter jurisdiction. Judge Lipez upheld dismissal for the same reason.
Judge Lipez said it was “erroneous” for the bankruptcy court to find jurisdiction “solely on the basis of the retention of jurisdiction provisions in the sale order and the plan.” Although a federal court may enforce its prior orders, he said it may not “retain” jurisdiction “it never had – i.e., over matters that do not fall within” 28 U.S.C. § 1334.
Judge Lipez therefore analyzed whether there was “arising under,” “arising in” or “related to” jurisdiction under Section 1334. There was no “related to” jurisdiction because there was no potential effect on the bankrupt estate since the bankruptcy judge had decided that the executives had no claims against the debtor.
There was no “arising under” jurisdiction, Judge Lipez said, because the Bankruptcy Code itself did not create the cause of action. That left “arising in” as the executives’ only jurisdictional hook.
The executives contended there was “arising in” jurisdiction because the bankruptcy court had approved the purchase agreement. Judge Lipez responded by saying, “[I]t is not enough for ‘arising in’ jurisdiction that a claim arose in the context of a bankruptcy case.” He said the claim “must have ‘no existence outside of the bankruptcy,’” citing Middlesex Power Equip. & Marine Inc. v. Town of Tyngsborough, Mass. (In re Middlesex Power Equip. & Marine Inc.), 292 F.3d 61 (1st Cir. 2002).
For “arising in” jurisdiction, Judge Lipez said the “fundamental question” is whether the claim “could arise only in the context of a bankruptcy case.” [Emphasis in original.]
To adjudicate the executives’ severance claims on the merits, a court “would only need to perform a state law breach of contract analysis.” Therefore, Judge Lipez said, the executives’ “claims ‘look like ones that could have arisen entirely outside the bankruptcy context.’”
There was no “arising in” jurisdiction because the executives “failed to identify any provision of the sale order itself or any related questions of bankruptcy law underlying their claims that would require interpretation by the bankruptcy court.”
Jurisdictionally speaking, Judge Lipez’s opinion therefore appears to make a distinction between a sale-approval order and the contract it approved. Enforcing the contract by itself does not give rise to jurisdiction, unless there were an effect on the estate. Or, the bankruptcy court may have had jurisdiction if there were an ambiguity in the sale order, or perhaps if the sale order itself had required payment.
The opinion therefore seems to mean that third parties may have difficulty calling on a bankruptcy court to approve a court-approved contract absent an effect on the estate.