December 06, 2018

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Is the Bankruptcy Court a Court?

By Michael Enright

The Court of Appeals for the Third Circuit recently affirmed the denial of a request to transfer an adversary proceeding, after the Bankruptcy Court and the District Court held that the Bankruptcy Court was not a "court" within the meaning of 28 U.S.C. Section 610 for purposes of the statute cited as the basis for the transfer request. Trosio v. Erickson, et al. (In re IMMC Corp.), No 18-1177 (3d Cir. Nov. 28, 2018). The Debtor filed a Ch. 11 case and the confirmed plan appointed a liquidating trustee. The trustee subsequently filed an adversary proceeding in the Bankruptcy Court against the former officers and directors of the Debtor for breach of their fiduciary duties in pursuing a risky litigation strategy in a suit against a competitor, and overcompensating themselves. After the Bankruptcy Court held that it lacked jurisdiction to hear the claims and concluded that this non-core proceeding was not sufficiently "related to" the Ch. 11 case, the trustee requested that the adversary proceeding be transferred to the District Court for the Eastern District of Pennsylvania, pursuant to 28 U.S.C. Section 1631. But Section 1631 applies only to civil actions filed in "a court as defined in Section 610 of this title," and any mention of bankruptcy courts in 28 U.S.C. Section 610 was deleted from the statute in 1984. Under the circumstances, the Bankruptcy Court concluded that it had no authority to transfer the case under Section 1631. The trustee then sought to withdraw the reference, but the District Court denied the request, and subsequently affirmed on the same grounds holding: bankruptcy courts are not "courts" under the plain language of Section 610. The Third Circuit affirmed the District Court, but used different reasoning. The Third Circuit noted that the District Court specifically ruled that because the claims were neither core nor "related to" the Ch. 11 case, the District Court had not referred the case to the Bankruptcy Court in the first place. Because the matter was never referred to it, the Bankruptcy Court had no authority over the matter under Northern Pipeline, and a transfer under Section 1631 could not cure this lack of "constitutional jurisdiction." The Third Circuit's opinion took care to note that its ruling does not call into question the validity of transfers under Bankruptcy Rules 1014 or 7087, because those rules are based upon other statutory authority. This decision will further inform practice, as well as ongoing scholarly debate in the aftermath of Stern v. Marshall, as well as the legacy of Northern Pipeline, particularly in regard to the distinction it outlines between "statutory jurisdiction" and "constitutional jurisdiction."

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.