Which Court Has Jurisdiction, Service First Or Filing First

First Circuit Clarifies the Telescopic of the Bankruptcy Court's Jurisdiction in Civil Proceedings

Recently, in Gupta 5. Quincy Medical Center, 858 F.3d 657 (1st Cir. 2017), the U.S. Courtroom of Appeals for the First Circuit clarified the limits of the defalcation courts' subject-thing jurisdiction over civil proceedings. The decision, authored by Judge Lipez and joined by retired Supreme Court Justice David Souter (sitting past designation), provides a thorough analysis of the bankruptcy courts' jurisdiction in such cases.

The decision hinges on the Court'south interpretation of 28 U.S.C. § 1334, the foundation of the defalcation courts' jurisdiction. Under § 1334(a), the bankruptcy courts (via referral from the district courts) have original jurisdiction over petitions for relief under the Bankruptcy Lawmaking. Under § 1334(b), the bankruptcy courts have jurisdiction over other civil proceedings "arising under," "arising in," or "related to" cases filed under the Code. In Gupta, the Starting time Circuit wrestled with the bankruptcy courts' jurisdiction under § 1334(b).

Gupta involves claims for severance payments past erstwhile senior executives of the debtor, a hospital in the Boston suburbs. Soon after filing its affiliate 11 petition, the debtor sold its avails in a 363 sale. The asset purchase understanding (APA) obligated the purchaser to make severance payments to employees who were terminated after the sale.

The order approval the 363 sale provided that the bankruptcy court would retain jurisdiction over whatever disputes arising under or related to the sale contract. The debtor's programme and the confirmation club also each provided that the bankruptcy court would retain sectional jurisdiction to enforce orders providing for the sale of the debtor's property.

Immediately after the sale closed, the purchaser terminated the executives. The executives sought an order from the defalcation courtroom requiring payment of severance, equally provided in the APA. The defalcation court held it had jurisdiction over the executives' claims, emphasizing the retentivity of jurisdiction provisions in the sale social club, plan, and confirmation lodge. After an evidentiary hearing, the defalcation courtroom entered an social club finding the purchaser liable to the executives for the severance pay.

The Courtroom of Appeals held that the defalcation court's jurisdictional assay was wrong. The First Circuit agreed that the defalcation courts (similar all federal courts) retain jurisdiction over the interpretation and enforcement of their prior orders, but stressed that "a bankruptcy court may non 'retain' jurisdiction it never had—i.east., over matters that exercise not fall within § 1334'south statutory grant." Thus, if the defalcation court never had jurisdiction over the executives' claims in the first place, the fact that the sale social club, program, and confirmation club purported to "retain" that jurisdiction was irrelevant.

In conducting its assay, the bankruptcy court had never analyzed whether information technology purported to have "arising under," "arising in," or "related to" jurisdiction under § 1334(b). On appeal, the Beginning Excursion undertook that analysis.

The Beginning Circuit apace rejected "arising nether" jurisdiction (which exists where the Bankruptcy Code itself creates the crusade of action) because Massachusetts contract police—not the Code—created the executives' claims for severance pay.

Besides, the Court rejected "related to" jurisdiction, which concerns claims that potentially may have an outcome on the bankruptcy estate. The executives' claims for severance pay confronting the purchaser, the Court of Appeals reasoned, could not conceivably impact the debtor's manor.

The only remaining possibility was "arising in" jurisdiction. But the Court found that lacking, besides. The Courtroom rejected the executives' statement that the defalcation court had "arising in" jurisdiction because, only-for the being of the debtor'south defalcation, their severance pay claims would not exist. It is non plenty, the Courtroom held, that a claim arose in the context of a defalcation case; in doing so, the Courtroom specifically rejected the executives' reliance on a "but for" test. Rather, the Court held, "for 'arising in' jurisdiction to utilize, the relevant proceeding must take no beingness outside of the defalcation context." In other words, "the fundamental question is whether the proceeding by its nature, not its particular factual circumstance, could ascend only in the context of a bankruptcy example." (accent in original) This standard, the Court concluded, was non met: the executives' claims equally "essentially employment disputes" based on state contract law, and thus "wait like [claims] that could have arisen entirely outside the bankruptcy context."

Information technology is no dubiousness tempting for practitioners and bankruptcy courts to include retention of jurisdiction clauses into orders resolving disputes in bankruptcy litigation. Gupta, however, suggests that such clauses might not be reflexively followed and that the jurisdictional foundation of the bankruptcy courts' rulings in civil proceedings may exist subjected to scrutiny.

Daniel A. Lowenthal