If a third party provided collateral to secure a loan to a chapter 11 debtor, does the bankruptcy court have jurisdiction and power to enter a final order if a dispute breaks out between the third party and the bank that lent to the debtor? In other words, can the bankruptcy court sometimes have core jurisdiction over a dispute between two third parties?
The Third Circuit said the answer is “yes.”
Already having pledged all its property to the secured lender, the corporate chapter 11 debtor was running out of cash. The debtor’s secured bank lender agreed to advance an additional $1 million if the debtor’s owner pledged his forthcoming tax refund. The bankruptcy court approved the loan with collateral provided by the debtor’s owner.
The debtor’s reorganization effort failed, and the case converted to chapter 7. The owner received a tax refund of more than $1 million that was held in the registry of the court. However, the owner and the bank disagreed about how much of the tax refund stood as collateral for the loan.
The bankruptcy court ruled in favor of the lender, and the district court affirmed. The owner appealed to the Third Circuit, challenging the bankruptcy court’s jurisdiction and constitutional authority to rule on the dispute with the lender.
In his February 11 opinion for the appeals court, Circuit Judge Stephanos Bibas did not allude to the bankruptcy court’s subject matter jurisdiction under 28 U.S.C. § 1334(b) as a dispute that was at least “related to” the bankruptcy case. Instead, he first ruled that the dispute fell within the “bankruptcy court’s statutory jurisdiction over core proceedings,” even though it might be considered a dispute between two third parties. 28 U.S.C. § 157(b)(2)(D) resolved the issue, he said.
That section permits a bankruptcy court to “hear and determine” all “core proceedings . . . arising in a case under title 11,” including “orders in respect to obtaining credit . . . .”
The interpretation of a loan agreement approved by the bankruptcy court “is the issue here,” Judge Bibas said in concluding that the bankruptcy court had core jurisdiction under the statute.
Next, Judge Bibas inquired whether the bankruptcy court’s entry of a final order exceeded the bankruptcy court’s constitutional authority.
The bankruptcy court had constitutional authority, Judge Bibas said, “because this dispute could have arisen only in bankruptcy.” Thus, he said, “the bankruptcy court’s exercise of jurisdiction did not offend Article III” of the Constitution.
Furthermore, Judge Bibas said, the bankruptcy court “plainly” had jurisdiction to interpret and enforce its own financing order. He therefore ruled that the bankruptcy court “properly exercised core-proceeding jurisdiction over the tax-refund dispute.”
Having found jurisdiction, Judge Bibas upheld the lower courts on the merits.
N.B.: Circuit Judge Thomas L. Ambro was on the panel along with Circuit Judge Cheryl Ann Krause.
If a third party provided collateral to secure a loan to a chapter 11 debtor, does the bankruptcy court have jurisdiction and power to enter a final order if a dispute breaks out between the third party and the bank that lent to the debtor? In other words, can the bankruptcy court sometimes have core jurisdiction over a dispute between two third parties?
The Third Circuit said the answer is “yes.”
Already having pledged all its property to the secured lender, the corporate chapter 11 debtor was running out of cash. The debtor’s secured bank lender agreed to advance an additional $1 million if the debtor’s owner pledged his forthcoming tax refund. The bankruptcy court approved the loan with collateral provided by the debtor’s owner.
The debtor’s reorganization effort failed, and the case converted to chapter 7. The owner received a tax refund of more than $1 million that was held in the registry of the court. However, the owner and the bank disagreed about how much of the tax refund stood as collateral for the loan.
The bankruptcy court ruled in favor of the lender, and the district court affirmed. The owner appealed to the Third Circuit, challenging the bankruptcy court’s jurisdiction and constitutional authority to rule on the dispute with the lender.
In his February 11 opinion for the appeals court, Circuit Judge Stephanos Bibas did not allude to the bankruptcy court’s subject matter jurisdiction under 28 U.S.C. § 1334(b) as a dispute that was at least “related to” the bankruptcy case. Instead, he first ruled that the dispute fell within the “bankruptcy court’s statutory jurisdiction over core proceedings,” even though it might be considered a dispute between two third parties. 28 U.S.C. § 157(b)(2)(D) resolved the issue, he said.