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First Circuit Court of Appeals Issues Opinion Clarifying Source of Bankruptcy Court’s Jurisdiction

June 12, 2017

On June 2, 2017, the First Circuit Court of Appeals issued a decision in Gupta v. Quincy Med. Ctr., No. 15-1183, 2017 WL 2389407 (1st Cir. June 2, 2017), concerning the scope of a bankruptcy court’s subject matter jurisdiction. The Court’s opinion reminded litigants that not all claims raised within a bankruptcy case are entitled to be decided by a bankruptcy court, and clarified the bases for a bankruptcy court’s jurisdiction.

 

The issue in Gupta was whether a retention of jurisdiction provision in a bankruptcy court order approving an asset purchase agreement (“APA”) within a Chapter 11 case gives a bankruptcy court jurisdiction to enforce the agreement outside of the Chapter 11 case. The First Circuit applied well settled principles governing the source of a bankruptcy court’s subject matter jurisdiction and held that a retention of jurisdiction provision included in a court order does not confer subject matter jurisdiction for that court. Reiterating that a federal court’s jurisdiction is limited by statute, the Court analyzed two main categories of cases where jurisdiction is granted to bankruptcy courts under 28 U.S.C. § 1334: (1) “cases under Title 11, 28 U.S.C. § 1334(a)”, referring only to the bankruptcy petition itself and, (2) “proceedings arising under Title 11, or arising in or relating to cases under Title 11, 28 U.S.C. § 1334(b)”. Gupta, WL 2389407 at 3. Gupta involved a dispute between the buyer of the Debtor’s assets and former employees of the Debtor under the APA, and thus was not a case involving the bankruptcy petition itself. Therefore, the Court analyzed whether or not the bankruptcy court had subject matter jurisdiction under § 1334(b).

 

The Court explained that “arising under” jurisdiction exists only when “the Bankruptcy Code itself creates the cause of action or provides the substantive right invoked”, citing Stoe v. Flaherty, 436 F.3d 209 (3d Cir. 2006). The Court then defined “arising in” jurisdiction as being present when the cause of action is “not based on any right expressly created by Title 11, but nevertheless, would have no existence outside the bankruptcy”, citing New Eng. Power & Marine, Inc. v. Town of Tyngsborough (In re Middlesex Power Equip. & Marine, Inc.), 292 F.3d 61, 68 (1st Cir. 2002). Finally, the court noted that a bankruptcy court has “related to” jurisdiction when the proceedings can potentially have some effect on the bankruptcy estate. See Gupta, WL 2389407 at 4.

 

Applying these principles, the Court found that no “arising under” jurisdiction existed because the rights being invoked arose under Massachusetts contract law, not the Bankruptcy Code. Similarly, there was no “relating to” jurisdiction because the proceedings would not impact the bankruptcy estate in any conceivable way. The Court further held that a “but for” test is not applicable to consider whether “arising in” jurisdiction is present. Rather, the nature of the proceedings not its factual circumstances must be considered. See Gupta, WL 2389407 at 6 (explaining that “arising in” jurisdiction exists if the claims are the types of claims that can only exist within a bankruptcy case). Thus, the First Circuit concluded that because breach of contract claims do not exclusively arise within a bankruptcy case, the bankruptcy court did not have “arising in” jurisdiction, and therefore no subject matter jurisdiction to hear the dispute over the terms of the APA.

 

The holding of Gupta does not establish a new legal doctrine but importantly, clarifies for litigants the source of a bankruptcy court’s jurisdiction. Although it is customary for bankruptcy courts to include retention of jurisdiction provisions in their orders so they can review and enforce their decisions in the event of a dispute, such provisions cannot create jurisdiction where the court did not originally have it. The First Circuit’s Gupta opinion reminds us of the limitations of such provisions and illustrates the fact that a federal court’s jurisdiction is created by statute, not sui generis or by court order.

 

Curran Antonelli represents a broad range of businesses and corporate entities, private equity funds, as well as governmental agencies and other interested parties in all phases of the bankruptcy process and in bankruptcy related transactions and litigation.  As advocates and trusted business advisors, our well-established foundation of knowledge and understanding of our clients’ business interests, enables our attorneys to deliver unparalleled individualized attention to our clients of all sizes with their litigation and corporate transactional needs.

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