By modifying the automatic stay, the bankruptcy court does not abandon all jurisdiction over the parties and the dispute, as explained in a February 16 nonprecedential opinion by the Tenth Circuit.
The chapter 7 debtor was a sublandlord of property that had been leased to a dry-cleaning business. Years before the debtor’s bankruptcy, the debtor evicted the dry cleaner. Many years later, the state sued the debtor, the prime landlord and others for environmental contamination from dry-cleaning fluids.
The debtor’s bankruptcy halted the suit in state court. A year into the bankruptcy case, the bankruptcy court modified the automatic stay so the parties could fight among themselves in federal district court about their environmental liabilities.
Three years later, the trustee and some of the state court parties settled. The stipulations fixed the claims of the setting parties in the bankruptcy case but did not resolve the litigation in state court, where the parties were free to continue litigating their respective liabilities to one another.
Some of the nonsettling parties objected to the settlement, claiming that the bankruptcy court lost jurisdiction on modifying the stay. The bankruptcy court overruled the objections and approved the settlement stipulations. The district court affirmed.
On the second appeal in the circuit, the nonsettling parties argued that the bankruptcy court relinquished jurisdiction by modifying the stay and that continuation of the litigation in state court divested the bankruptcy court of jurisdiction. Neither argument persuaded the circuit.
The appeals court observed that Section 362 “say[s] nothing about the bankruptcy court relinquishing jurisdiction by” modifying the stay. The circuit court distinguished cases cited by the objectors.
The objectors relied on a Ninth Circuit decision reversing a bankruptcy court that had ruled on the merits of a claim after modifying the stay. The Tenth Circuit observed that “the bankruptcy court did not adjudicate any claims on the merits but approved a settlement.”
The objectors cited cases “discussing whether subsequent action by a court with concurrent jurisdiction divests the bankruptcy court’s jurisdiction.” Again, the Tenth Circuit distinguished the cases and said that “the bankruptcy court maintained ‘related to jurisdiction” because the “settlement motions here affect the administration of the bankruptcy estate.”
The Tenth Circuit’s opinion has important language about notice in bankruptcy cases.
In one of the settlements approved by the bankruptcy court, there was no “formal” notice to the objectors. Nonetheless, the appeals court said that the objectors received “actual notice” of the settlement, as shown by their having filed objections.
As a matter of due process in bankruptcy proceedings, the appeals courts said that “actual notice is adequate even if formal notice is not received, and formal notice is not mandatory.”
The appeals court upheld the settlements.
By modifying the automatic stay, the bankruptcy court does not abandon all jurisdiction over the parties and the dispute, as explained in a February 16 nonprecedential opinion by the Tenth Circuit.
The chapter 7 debtor was a sublandlord of property that had been leased to a dry-cleaning business. Years before the debtor’s bankruptcy, the debtor evicted the dry cleaner. Many years later, the state sued the debtor, the prime landlord and others for environmental contamination from dry-cleaning fluids.
The debtor’s bankruptcy halted the suit in state court. A year into the bankruptcy case, the bankruptcy court modified the automatic stay so the parties could fight among themselves in federal district court about their environmental liabilities.
Three years later, the trustee and some of the state court parties settled. The stipulations fixed the claims of the setting parties in the bankruptcy case but did not resolve the litigation in state court, where the parties were free to continue litigating their respective liabilities to one another.