District Judge Arthur D. Spatt of Brooklyn, N.Y., resolved a jurisdictional tug-of-war between bankruptcy courts on opposite sides of the country. He decided that the first bankruptcy court to have acquired jurisdiction over property has the first claim to jurisdiction if a new owner puts the same property into a second bankruptcy.
The original owner of seven parcels of real property confirmed a chapter 11 plan in Washington State. The plan modified a lender’s secured claim on the properties. According to the lender, the plan barred the owner from selling the properties without the lender’s consent and without paying the secured claim in full.
About five years later, after the Washington bankruptcy case had been closed, the lender initiated nonjudicial foreclosure and installed a receiver. Later, the original owner sold the properties to a new owner without paying the lender. A month later, the new owner filed a chapter 11 petition on Long Island, N.Y.
Twenty days after the New York filing, the lender reopened the Washington bankruptcy and filed a motion to declare that the sale was void and in violation of the plan and that the original owner remained the owner of the properties.
The new owner-debtor responded with a motion to declare that the lender’s motions in Washington violated the automatic stay in New York and to enjoin the lender from proceeding in Washington.
The bankruptcy court in New York ruled that the automatic stay in the new bankruptcy applied to the disputed properties and that the lender could not proceed in Washington.
The lender appealed and won in Judge Spatt’s February 26 opinion. He framed the issue as whether the New York or Washington bankruptcy court “had jurisdiction to determine the status of the Washington properties.”
Judge Spatt recited the usual rules about post-confirmation retention of confirmation. Although a court retains jurisdiction to interpret its own orders, he said that jurisdiction “shrinks” after confirmation.
In the Second Circuit, he said, there are two tests regarding retention of post-confirmation jurisdiction: (1) There must be a “close nexus” to the original bankruptcy, and (2) the plan in the original bankruptcy must have provided for the retention of jurisdiction.
Judge Spatt said there was a close nexus to the Washington bankruptcy because the dispute “implicates” the original owner’s plan, especially since the seven properties were the original debtor’s most valuable assets.
The second prong was satisfied because the plan contained provisions continuing jurisdiction over disputes of the sort.
The new owner claimed the Washington court could not have jurisdiction because the case had been close. Judge Spatt nixed the argument, saying that a court retains jurisdiction to interpret its own orders even after a case has been closed or dismissed.
Judge Spatt said it could not be determined whether the properties belonged to the new owner until the Washington court ruled on the dispute over ownership, because the Washington court “expressly retained jurisdiction as to whether the Washington properties were properly transferred.”
Without a ruling from Washington that the properties belonged to the new owner, Judge Spatt said that the lender’s “actions do not violate the stay.”
There may be flaws in Judge Spatt’s logic. To begin with, the new owner would appear to have had some legal interest in the properties to fall within the jurisdiction of the New York court. Judge Spatt’s analysis seems to assume that the transfer was presumptively void until a ruling to the contrary. He also seems to equate retention of jurisdiction with retention of exclusive jurisdiction.
The better procedure may have been: (1) The New York court modifies the automatic stay, allowing the Washington court to decide whether the transfer violated the Washington plan, while (2) the New York court administers the new bankruptcy pending a decision in Washington. Or, the New York court could have transferred venue to Washington. Either way, the two bankruptcy courts would have acted in tandem and not at odds.