In In re Douglas Ray, [1] the Ninth Circuit recently held that a bankruptcy court lacks jurisdiction to reopen a closed case to preclude a collateral attack on its prior, final sale order.
Background
Douglas M. Ray (the debtor), who co-owned the Battle Ground Shopping Mall, filed a chapter 11 case in August 2000. The bankruptcy court authorized Ray to enter into a purchase agreement with Battle Ground Plaza LLC (BG Plaza), which provided for the sale of the mall and granted BG Plaza a right-of-first-refusal for a separate, half-acre adjoining parcel. In 2002, the court approved a reorganization plan, which provided for the consummation of the BG Plaza transaction and specifically referenced a potential future sale of the adjoining parcel. [2] The case remained open while the debtor tried to locate a purchaser for the adjoining parcel.
Three years later, in November 2005, the debtor moved to sell the adjoining parcel to Dean Maldonado (the “buyer”). Upon learning of the sale, BG Plaza purported to exercise its RFR —but modified the closing terms—and objected to the proposed sale. Because BG Plaza did not mirror the offer from the buyer, the court overruled the objection as an improper exercise of its first-refusal rights. In approving the sale to the buyer, the bankruptcy court specifically provided that the sale was “free and clear of all liens and encumbrances…including but not limited to the right of first refusal granted to [BG Plaza]” (the “sale order”). [3] BG Plaza moved for reconsideration of the sale order, which was subsequently denied by the court, and did not appeal the sale order. As a result, the sale order became final, the sale to buyer closed and the debtor used the proceeds to pay creditors under its plan. Once the assets were fully administered, the case was closed in December 2005. [4]
In June 2006—a mere six months after the case was closed—BG Plaza filed a state-court action against the buyer and debtor, alleging breach of its first-refusal right and sought specific performance (i.e., turnover of the adjoining parcel) plus damages. The state court remanded to the bankruptcy court, which found that it had jurisdiction to reopen the case and dismissed the complaint based on the previous sale order. [5] The bankruptcy appellate panel affirmed and held that the bankruptcy court had jurisdiction to decide the case. BG Plaza subsequently filed an appeal in the Ninth Circuit.
Ninth Circuit’s Holding and Reasoning
The Ninth Circuit reversed, holding that the bankruptcy court lacked jurisdiction under 28 U.S.C. § 1334(b) over BG Plaza’s breach-of-contract action. Specifically, the court held that the state-court case (1) did not “arise under” title 11 because it involved issues of state law that were completely independent of the bankruptcy case; (2) did not “arise in” title 11 because it was not an administrative matter unique to the bankruptcy process that had no independent existence outside of bankruptcy; and (3) was not “related to” the bankruptcy case due to the absence of a close nexus to the plan or proceeding sufficient to uphold jurisdiction. [6]
The court further refused to find that the bankruptcy court had ancillary jurisdiction to interpret and enforce its previous sale order. Because the case had been closed after the creditors were paid and the debtor had been discharged, the court reasoned that reopening the case “stretches the limits of the bankruptcy court’s ancillary jurisdiction too far, going beyond what is necessary for the bankruptcy court to effectuate its decrees.” [7] Moreover, the court noted that a bankruptcy court cannot retain ancillary jurisdiction to interpret and enforce its prior order even where it specifically preserves that power in the order. [8] Although it acknowledged that BG Plaza’s claim would undermine the effect of the sale order, the court did not perceive that permitting it to be collaterally attacked in state court would impact the estate because the case was closed and the state court could simply give the sale order preclusive effect on res judicata grounds and thereby dismiss the claim. [9]
Implications of Ninth Circuit’s Decision
Although the impact of the Ray decision remains an open question, its restrictive view of a bankruptcy court’s subject-matter jurisdiction—particularly its ancillary jurisdiction to interpret and enforce its previous orders—is surprising in at least a couple of respects.
First, the Ninth Circuit framed the issue as a breach-of-contract action between third parties, rather than a dispute as to the effect of the sale order. There was no question that BG Plaza had notice that the sale of the adjoining parcel would impact its first-refusal rights. Indeed, the bankruptcy court overruled such objections before issuing the sale order. However, when BG Plaza failed to appeal that order, it became final. In reopening the case, the bankruptcy court did not encroach upon the state court’s expertise with respect to contract interpretation, but simply exercised its ancillary jurisdiction to enforce, and determine the effect of, its own prior sale order. [10]
Second, the Ninth Circuit relied on the fact that the bankruptcy court closed the debtor’s case after the sale order became final, but that reliance seems misplaced. As an initial matter, § 350(b) of the Bankruptcy Code expressly authorizes bankruptcy courts to reopen cases in certain circumstances. In any event, the Advisory Committee Notes to Rule 3022 of the Federal Rules of Bankruptcy Procedure acknowledges that closing a case does “not deprive the court of jurisdiction to enforce or interpret its own orders.”
Conclusion
The Ninth Circuit has unnecessarily limited the ability of a bankruptcy court to preserve its ancillary jurisdiction, even in a case involving the unique power of bankruptcy courts to order the sale of property free clear of interests.
1. Battle Ground Plaza LLC v. Douglas Ray et al. (In re Douglas Ray), 624 F.3d 1124 (9th Cir. 2010).
2. Id. at 1127-28.
3. Id. at 1128-29.
4. Id. at 1129.
5. Id.
6. See Ray, 624 F.3d at 1130-35.
7. Id. at 1136 (internal quotation marks omitted).
8. Id. at 1136, n.8.
9. Id. at 1135.
10. Cf. Travelers Indemnity Co. v. Bailey, 129 S.Ct. 2195, 2205 (2009) (holding that bankruptcy court “plainly ha[s] jurisdiction to interpret and enforce its own prior orders”).
Committees