A Lack of ‘Stern’ Jurisdiction Bars a Transfer Under 28 U.S.C. § 1631

Even if a bankruptcy court is considered a “court of the United States,” the bankruptcy court does not have power to transfer a suit to another district under 28 U.S.C. § 1631 if the bankruptcy court lacks constitutional jurisdiction in the first place, the Third Circuit held.

The Governing Statutes

Section 1631 was adopted to ensure that a suit will not be barred by the statute of limitations if the suit was originally filed in a district lacking jurisdiction. When “a civil action is filed in a court as defined in [28 U.S.C. §] 610, . . . and that court finds that there is a want of jurisdiction,” the section provides that “the court shall, if it is in the interest of justice, transfer such action” to a court where the suit could have been brought, “and the action . . . shall proceed as if it had been filed [in the transferee court] . . . on the date” when it was filed in the original court.

In turn, Section 610 defines “courts” to include “the courts of appeals and district courts of the United States,” and other courts not relevant to the case on appeal.

The Suit in Bankruptcy Court

A company confirmed a chapter 11 plan that created a liquidating trust. After confirmation, the liquidating trustee sued the company’s former officers and directors for breach of fiduciary duties.

The bankruptcy court held that the suit was not “core.” Even if the suit were “related to” the reorganization, the bankruptcy court also held that it had no jurisdiction because the suit did not have the required “close nexus” to the chapter 11 plan that must be present for the bankruptcy court to have jurisdiction following confirmation in the Third Circuit.

To avoid dismissal, the liquidating trustee moved the bankruptcy court to transfer the suit under Section 1631 to a district court that would have jurisdiction.

The bankruptcy court denied the transfer motion, reasoning that the bankruptcy court was not a “court” within the meaning of Sections 610 and 1631. The district court affirmed on the same grounds.

To avoid dismissal, the bankruptcy court permitted the liquidating trustee to file a motion to withdraw the reference, so the district court could exercise its indisputable power to transfer the suit under Section 1631.

Unfortunately, the district court denied the motion to withdraw the reference, concluding there was no power to withdraw the reference of a proceeding that was never properly referred because there was no jurisdiction in the bankruptcy court in the first place.

The Third Circuit Opinion

The liquidating trustee appealed to the circuit court from the orders of the bankruptcy court refusing to transfer the suit under Section 1631. The liquidating trustee argued that the Third Circuit had held that a bankruptcy court is a “court of the U.S.” in the context of the imposition of sanctions under 28 U.S.C. § 1927. The same principle should apply to a bankruptcy court’s power under Section 1631, the trustee argued.

In her Nov. 28 opinion, Circuit Judge Marjorie O. Rendell upheld the result in the lower courts, although on a different theory.

Judge Rendell noted that the courts are split on whether a bankruptcy court is a “court of the U.S.” eligible to issue sanctions under Section 1927.

Some courts, according to Judge Rendell, hold that bankruptcy courts do not qualify because they are not among the courts listed in 28 U.S.C. § 451. However, the Third Circuit took the opposite view in In re Schaefer Salt Recovery, 542 F.3d 90 (3d Cir. 2008), by holding that bankruptcy courts may impose Section 1927 sanctions because they are “units” of the district court, even if they are not “courts of the U.S.”

Nonetheless, Judge Rendell said there was a “key distinction” between the case on appeal and a Section 1927 case like Schaefer Salt, where the bankruptcy court clearly had jurisdiction. In the case at hand, the bankruptcy court lacked jurisdiction, she said.

Exercising jurisdiction by transferring the suit under Section 1631, according to Judge Rendell, “would have been ultra vires, regardless of whether the bankruptcy courts fall under Section 610’s definition of courts.” She went on to say that “a bankruptcy court that lacks jurisdiction over a proceeding cannot transfer that proceeding under Section 1631,” regardless of whether “Congress intended bankruptcy courts to fall under Section 610’s definition of courts by virtue of their status as units of the district courts.”

Judge Rendell made another distinction. She analyzed Section 1631 “as intending to permit a transfer to remedy a lack of statutory jurisdiction,” such as federal question jurisdiction or diversity jurisdiction. The case on appeal did not involve statutory jurisdiction but instead represented a lack of constitutional jurisdiction. “Transfer under Section 1631 simply cannot cure this lack of constitutional jurisdiction,” she said.

Judge Rendell ended her opinion by saying that the opinion “does not call into question” the power of a bankruptcy court to transfer suits or cases under other statutes or rules, such as Bankruptcy Rules 7087 and 1014.