State law requiring exhaustion of administrative remedies cannot divest the bankruptcy court of “core” jurisdiction, according to a July 27 opinion by Bankruptcy Judge Elizabeth L. Gunn of Washington, D.C.
The corporate debtor, a provider of technology-based services, confirmed a liquidating plan under Subchapter V of chapter 11. Before confirmation, the State of Maryland filed a claim for some $2.5 million. Also before confirmation, the debtor filed an objection to the claim.
Two months after confirmation, the debtor initiated an adversary proceeding against the state seeking damages and alleging breach of contract.
The bankruptcy court retained jurisdiction in the confirmed plan for anything arising from or related to the plan. The debtor contended that the adversary proceeding fell within the retention of jurisdiction.
The state disagreed, filing a motion to dismiss. The state pointed to state law requiring the exhaustion of remedies for a suit of the sort and contended that the bankruptcy court lacked subject matter jurisdiction from the debtor’s failure to exhaust administrative remedies.
Some of the issues in the claim objection overlapped with claims in the adversary proceeding. Judge Gunn said she was confronted with deciding “who owes whom for what for information technology services.”
Post-Confirmation Jurisdiction
Even if there’s retention of jurisdiction in the plan, Judge Gunn said that post-confirmation jurisdiction turns on whether there is a “close nexus” to the plan, giving the court “related to” jurisdiction under 28 U.S.C. § 1334(b).
Judge Gunn held that the issues in the claim objection and in the adversary proceeding were “core” because they would “impact” the administration of the estate and the allowance of a claim. Even in the absence of the claim objection, she said there would be “related to” jurisdiction with a “close nexus” to the estate because the debtor’s claims in the adversary proceeding were property of the estate and would affect the distribution to creditors.
Judge Gunn therefore held that the bankruptcy court had subject matter jurisdiction.
Exhaustion of Remedies
Given the state’s reliance on state law, Judge Gunn framed the next question as “whether a contractual or state law requirement for the exhaustion of administrative remedies modifies or otherwise would divest this Court of its ‘arising in’ or ‘related to’ jurisdiction.”
The state cited a decision from the bankruptcy court in Delaware holding there was no jurisdiction in light of state law requiring exhaustion of remedies. Judge Gunn distinguished and declined to follow the case because the Delaware court found the claims to be noncore.
Judge Gunn also declined to follow a decision from a bankruptcy court in California requiring an exhaustion of remedies under the Internal Revenue Code. “Unlike a competing federal statute,” she said, “the Maryland state statute cannot divest this Court of otherwise appropriate subject matter jurisdiction.”
Instead, Judge Gunn followed Siegel v. California Self-Insurer’s Security Fund (In re Circuit City Stores, Inc.), 08-35653, 2016 Bankr. LEXIS 1896 (Bankr. E.D. Va. Apr. 26, 2016), a case that presented the “exact issue.”
After confirmation, the debtor in Circuit City sued insurers, who moved to dismiss under state insurance law requiring exhaustion of administrative remedies. After the Virginia bankruptcy court decided that the matters were “core” and arose in or related to the bankruptcy, the court held that “[s]tate law cannot divest a federal court of its subject-matter jurisdiction.” Id. at *192.
Judge Gunn denied the motion to dismiss, holding that “[n]othing in the Maryland state law or the [contract between the parties] can divest or prohibit this Court from exercising the subject matter jurisdiction granted to it by Congress.”
State law requiring exhaustion of administrative remedies cannot divest the bankruptcy court of “core” jurisdiction, according to a July 27 opinion by Bankruptcy Judge Elizabeth L. Gunn of Washington, D.C.
The corporate debtor, a provider of technology-based services, confirmed a liquidating plan under Subchapter V of chapter 11. Before confirmation, the State of Maryland filed a claim for some $2.5 million. Also before confirmation, the debtor filed an objection to the claim.
Two months after confirmation, the debtor initiated an adversary proceeding against the state seeking damages and alleging breach of contract.
The bankruptcy court retained jurisdiction in the confirmed plan for anything arising from or related to the plan. The debtor contended that the adversary proceeding fell within the retention of jurisdiction.