‘Related To’ Jurisdiction Is Measured When the Suit Is Filed, Not Later, Circuit Says

If “related to” jurisdiction exists at the outset of a lawsuit, the court retains personal and subject matter jurisdiction even if the basis for “related to” jurisdiction disappears later, the Fifth Circuit held on August 26.

Although subject matter jurisdiction continues to exist as a technical matter, the district court may still dismiss the suit as a matter of discretion, the circuit said.

Based on “related to” jurisdiction under 28 U.S.C. § 1334(b), a chapter 11 debtor brought a contract action in federal district court against two defendants. Later, the debtor assigned the claim to a creditor.

On motion by the defendants, the district court dismissed the suit for lack of personal and subject matter jurisdiction. The district court reasoned that jurisdiction ceased to exist when there was no longer a basis for “related to” jurisdiction once prosecution of the suit would no longer affect the chapter 11 estate.

In a five-page opinion, Fifth Circuit Judge Gregg Costa reversed the district court.

In a suit based on “ordinary” diversity or federal question jurisdiction, Judge Costa recited “hornbook law” for the proposition that jurisdiction is tested by the “time-of-filing rule.” In other words, jurisdiction for the duration of a suit “is determined when a federal court’s jurisdiction is first invoked.”

Judge Costa held that the rule also governs “related to” jurisdiction. The district court, he said, “erred by failing to apply the time-of-filing rule to Section 1334(b)” because the principle “applies to bankruptcy jurisdiction no less than it applies to diversity or federal question jurisdiction.”

“Indeed,” he said, “even the closing of a bankruptcy case does not divest federal courts of Section 1334(b) jurisdiction.”

Similarly, the time-of-filing rule resulted in the continuation of personal jurisdiction.

In an ordinary case based on federal question or diversity jurisdiction, personal jurisdiction over a defendant is based on F.R.C.P. 4, which requires the defendant to have sufficient contacts with the state where the suit is brought.

But when jurisdiction is based on Section 1334(b), Judge Costa described how Bankruptcy Rule 7004 allows “nationwide service of process without limitation to the reach of the forum state’s courts.” When service of process is made under Rule 7004, minimum contacts with the state “are beside the point,” he said, because minimum contacts with the U.S. “suffice.”

Judge Costa therefore held that “Section 1334(b) jurisdiction that existed when the case was filed thus means there is both subject matter and personal jurisdiction” even after there is no longer an effect on the estate.

That wasn’t the end of the story. In the Fifth Circuit and elsewhere, Judge Costa cited the “general rule” that “strongly” favors discretionary dismissal if the bankruptcy case has been dismissed.

Judge Costa remanded the case for the district court to decide whether discretionary dismissal would be appropriate. He also called on the district court to consider the forum selection clause in the parties’ contract and the possibility of “a venue transfer” rather than dismissal.